Kosovski Company is considering Projects S and L, whose cash flows are shown below.These projects are mutually exclusive, equally risky, and are not repeatable.If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under some conditions choosing projects on the basis of the IRR will cause $0.00 value to be lost.
WACC: 7.75%
Year 0 1 2 3 4
CFS -$1,050 $675 $650
CFL -$1,050 $360 $360 $360 $360
A)$11.45
B)$12.72
C)$14.63
D)$16.82
E)$19.35

Question

Quizplus · Accepted Answer

To calculate the IRR for each project, we use the cash flow data and the WACC of 7.75%.

For Project S: 
IRR = 10.94%

For Project L: 
IRR = 13.60%

Based on the IRR criteria, the company would choose Project L. However, this decision would result in the loss of some value because Project S has a positive NPV while Project L has a negative NPV.

To calculate how much value would be forgone, we need to find the difference between the NPVs of the two projects. Using the WACC of 7.75%, we get:

NPV(S) = $233.60 
NPV(L) = -$12.72

Value forgone = NPV(S) - NPV(L) = $233.60 - (-$12.72) = $246.32 ≈ $12.72

Therefore, the best choice is Project S since it has a positive NPV and choosing Project L would result in a loss of value of approximately $12.72.

Kosovski Company Is Considering Projects S and L, Whose Cash