Tesar Chemicals Is Considering Projects S and L, Whose Cash

question 45

Multiple Choice

Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

• A) $138.10
• B) $149.21
• C) $160.31
• D) $171.42
• E) $182.52

Understand the concept of opportunity cost in economic decision making.

Comprehend the difference between rational and irrational decision making.

Identify the role and calculation of marginal costs and benefits in optimal decision making.

Differentiate between explicit and implicit costs and their importance in understanding economic and accounting profits.

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Definitions:

B₂B Purchasing Process

The sequence of steps a business goes through to purchase goods or services from another business, often involving complex decision-making and multiple stakeholders.

Consumer Decision-Making Process

The stages a consumer goes through before purchasing a product, including problem recognition, information search, evaluation of alternatives, purchase decision, and post-purchase behavior.

Derived Demand

A situation where the demand for one product or service occurs as a result of the demand for another product or service.

Resellers

Businesses or individuals that buy products or services with the intention of selling them rather than consuming or using them.