Nast IncIs Considering Projects S and L,whose Cash Flows Are Shown

question 29

Multiple Choice

Nast 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 MIRR rather than the one with the higher NPV,how much value will be foregone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. $\begin{array}{ccccc}\text { WACC: } & 9.00 \% \\&0 & 1 & 2 & 3 & 4 \\\hline \mathrm{CFS}_{\mathrm{S}} &-\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \\\mathrm{CF}_{\mathrm{L}} &-\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725\end{array}$

• A)$24.71
• B)$27.46
• C)$30.51
• D)$33.90

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Definitions:

Claim Dilution

The reduction in the likelihood of recovery or the value of each creditor’s claim as a result of an increase in the number of claimants or claims against the same debtor or asset.

Secured Loan

A loan that is backed by collateral, providing the lender with assurance that the loan will be repaid.

Unsecured Loan

A loan given without requiring collateral from the borrower.

Underinvestment

The situation where a company or individual invests less than is optimal, potentially leading to lower returns or growth than possible.