Projects S and L,whose Cash Flows Are Shown Below,are Mutually

question 19

Multiple Choice

Projects S and L,whose cash flows are shown below,are mutually exclusive,equally risky,and not repeatable.Hooper Inc.is considering which of these two projects to undertake.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 project with the higher IRR will also have the higher NPV,so no value will be lost if the IRR method is used. $\begin{array}{lccccc}\text { WACC: } & 10.25 \% & & & & \\\text { Year } & 0 & 1 & 2 & 3 & 4 \\\mathrm{CF}_{\mathrm{S}} & -\$ 2,050 & \$ 750 & \$ 760 & \$ 770 & \$ 780 \\\mathrm{CF}_{\mathrm{L}} & -\$ 4,300 & \$ 1,500 & \$ 1,518 & \$ 1,536 & \$ 1,554\end{array}$

• A) $134.79
• B) $141.89
• C) $149.36
• D) $164.29
• E) $205.36

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Definitions:

Continuing Shareholders

Continuing shareholders are individuals or entities that retain their shares in a company through various corporate actions or transactions, maintaining their stake in the company.

Sold

The act of transferring ownership of an asset or security from a seller to a buyer in exchange for money or equivalent.

Retained Earnings

Profits kept by a corporation for reinvestment in its operations, rather than being distributed to shareholders as dividends.

Paid in Excess

The amount paid by investors over the par value of a stock, typically recorded in the additional paid-in capital account on the balance sheet.