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c. You should recommend that the project be accepted because (1) its
NPV is positive and (2) although it has two IRRs, in this case it would
be better to focus on the MIRR, which exceeds the WACC. You should
explain this to the president and tell him that the firm’s value will
increase if the project is accepted.
d. You should recommend that the project be rejected. Although its NPV
is positive it has two IRRs, one of which is less than the WACC, which
indicates that the firm’s value will decline if the project is accepted.
e. You should recommend that the project be rejected because, although
its NPV is positive, its MIRR is less than the WACC, and that indicates
that the firm’s value will decline if it is accepted.
5. A firm is considering Projects S and L, whose cash flows are shown
below. These projects are mutually exclusive, equally risky, and not
repeatable. The CEO wants to use the IRR criterion, while the CFO
favors the NPV method. You were hired to advise the firm on the best
procedure. If the wrong decision criterion is used, how much potential
value would the firm lose?
WACC: 6.00%
Year 0 1 2 3 4
CFS -$1,025 $380 $380 $380 $380
CFL -$2,150 $765 $765 $765 $765
a. $188.68
b. $198.61
c. $209.07