Kosovski Company Is Considering Projects S and L, Whose Cash $\quad$

question 70

Short Answer

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. WACC: $\quad$$7.75 \%$

$\begin{array}{c}\begin{array}{lll} \text {Year}\\ \text {CF}_{S} \\ \text {CF}_{L} \end{array}\begin{array}{c} 0 \\\hline -\$1,050\\-\$1,050\end{array}\begin{array}{c}1 \\\hline \$675\\360\end{array}\begin{array}{c}2 \\\hline \$650\\\$360\end{array}\begin{array}{c}3 \\\hline \\\$360\end{array}\begin{array}{c}4 \\\hline \\\$360\end{array}\end{array}$

a. $\$ 11.45$
b. $\$ 12.72$
c. $\$ 14.63$
d. $\$ 16.82$
e. $\$ 19.35$

---

Definitions:

Deficiency

A shortfall or insufficiency in amount or quantity, such as when liabilities exceed assets or when actual performance is less than the standard or expected performance.

Market Value

The existing market rate at which you can purchase or sell an asset or service.

Book Value

The value of an asset as shown on a company's balance sheet, calculated as the cost of the asset minus any depreciation and amortization.

Capital Balance

The amount of funds contributed by owners or shareholders to a business, plus retained earnings and reduced by any withdrawals or distributions.