Drilling Inc.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 MIRR.If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone.In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs.MIRR will have no effect on the value lost.

$$\begin{array}{l}
\text { WACC: } 9.00 \%\
\begin{array} { | l | l | l | l | l | l | }
\hline & 0 & 1 & 2 & 3 & 4 \
\hline \text { CFS } & - \$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \
\hline \text { CFL } & - \$ 2,750 & \$ 725 & \$ 725 & \$ 800 & \$ 1,400 \
\hline
\end{array}
\end{array}$$

A)$185.90
B)$197.01
C)$208.11
D)$219.22
E)$230.32

Question

Drilling Inc.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 MIRR.If the decision is made by choosing the project with the higher IRR rather than the one with the higher MIRR, how much, if any, value will be forgone.In other words, what's the NPV of the chosen project versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs.MIRR will have no effect on the value lost.

\begin{array}{l}\text { WACC: } 9.00 \%\\\begin{array} { | l | l | l | l | l | l | } \hline & 0 & 1 & 2 & 3 & 4 \\\hline \text { CFS } & - \$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \\\hline \text { CFL } & - \$ 2,750 & \$ 725 & \$ 725 & \$ 800 & \$ 1,400 \\\hline\end{array}\end{array}

$$\begin{array}{l}
\text { WACC: } 9.00 \%\
\begin{array} { | l | l | l | l | l | l | } 
\hline & 0 & 1 & 2 & 3 & 4 \
\hline \text { CFS } & - \$ 1,100 & \$ 550 & \$ 600 & \$ 100 & \$ 100 \
\hline \text { CFL } & - \$ 2,750 & \$ 725 & \$ 725 & \$ 800 & \$ 1,400 \
\hline
\end{array}
\end{array}$$

A)$185.90
B)$197.01
C)$208.11
D)$219.22
E)$230.32

Quizplus · Accepted Answer

IRR and MIRR will give the same decision if the reinvestment rate equals the WACC. In this case, the IRR of Project S is 10.00% and the IRR of Project L is 12.00%. Since the WACC is 9.00%, the IRR criterion will lead to the selection of Project L, which has the higher IRR. The MIRR of Project S is 10.00% and the MIRR of Project L is 11.00%. Since the WACC is 9.00%, the MIRR criterion will also lead to the selection of Project L, which has the higher MIRR. Therefore, the choice of IRR vs. MIRR will have no effect on the value lost.

Drilling Inc A)$18590 B)$197

Drilling Inc A)$18590
B)$197