Tesar Chemicals Is Considering Projects S and L,whose Cash Flows

question 76

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) $102.07
• B) $118.25
• C) $124.47
• D) $95.84
• E) $133.18

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Definitions:

Significance Level

Significance level is a threshold in hypothesis testing, denoting the probability of rejecting the null hypothesis when it is actually true, often set at 0.05 or 5%.

Power of the Test

The probability that the test correctly rejects the null hypothesis when the alternative hypothesis is true, indicating the test's effectiveness.

Power Consumption

The amount of electrical energy used by devices or infrastructure within a specific timeframe, often measured in kilowatt-hours (kWh).

Standard Deviation

An analytical tool used to determine the level of variability or divergence among data values.