Sexton Inc $\quad 10.25 \%$ A $\$134.79$ B $\$ 141.89$ C $\$ 149.36$

question 5

Short Answer

Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. WACC: $\quad 10.25 \%$
$\begin{array}{c}\begin{array}{lll} \text {Year}\\ \text {CF}_{S} \\ \text {CF}_{L} \end{array}\begin{array}{c} 0 \\\hline -\$2,050\\-\$4,300\end{array}\begin{array}{c}1 \\\hline \$750\\1,500\end{array}\begin{array}{c}2 \\\hline \$760\\\$1,518\end{array}\begin{array}{c}3 \\\hline \$770\\\$1,536\end{array}\begin{array}{c}4 \\\hline \$780\\\$1,554\end{array}\end{array}$

a. $\$134.79$
b. $\$ 141.89$
c. $\$ 149.36$
d. $\$164.29$
e. $\$205.36$

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Definitions:

Consumer Goods

Products and services that are used by individuals or households to satisfy their immediate wants and needs.

Production Possibilities

The various combinations of goods and services an economy can produce when all its resources are fully employed.

Capital Goods

Long-lasting goods that are used in the production of other goods or services and are not consumed in the production process.

Consumer Goods

Products that are purchased for consumption by the average consumer.