Kosovski Company Is Considering Projects S and L,whose Cash Flows $\text { WACC: } \quad 6.25 \%$

question 93

Multiple Choice

Kosovski Company is considering Projects S and L,whose cash flows are shown below.These projects are mutually exclusive,equally risky,and are not repeatable.If the decision is made by choosing the project with the higher IRR,how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost. $\text { WACC: } \quad 6.25 \%$
$\begin{array}{llllll}&0&1&2&3&4\\\hline\mathrm{CF}_{\mathrm{S}} & -\$ 1,050 & \$ 675 & \$ 650 & & \\\mathrm{CF}_{\mathrm{L}} & -\$ 1,050 & \$ 360 & \$ 360 & \$ 360 & \$ 360\end{array}$

• A) $29.26
• B) $35.69
• C) $34.82
• D) $26.33
• E) $31.31

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Definitions:

Value-Based Pricing

A pricing strategy where the price of a product or service is determined by the perceived value it brings to the customer rather than its cost of production or market competition.

Absorption Costing

An accounting formula that rolls in every cost incurred in manufacturing—direct materials, direct labor, and both variable and fixed manufacturing overhead—into the product’s final cost.

Markup

The amount added to the cost price of goods to cover overhead and profit, expressed as a percentage of the cost.

Return On Investment

A financial metric used to evaluate the efficiency or profitability of an investment, calculated by dividing the gain from the investment by its cost.