1) Moerdyk & Co

1) Moerdyk & Co. 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, i.e., no conflict will exist. 

WACC:

7.75%

Year                            CFS                        CFL

0                                 -$1,025                   -$1,025

1                                   650                            100

2                                   450                             300

3                                    250                            500

4                                    50                              700

  a) $35.63

b) $42.42

c) $40.30

d) $50.06

e) $52.18

2) Yonan 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 shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.

WACC:

10.00%

Year                          CFS                       CFL

0                               -$950                     -$2,100

1                                 500                         400

2                                 800                          800

3                                   0                            800

4                                   0                            1000

    a) $35.82

b) $43.16

c) $53.08

d) $51.36

e) $38.41