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.

Based on the cashflows of these projects and the IRR, the project with the higher IRR would be CFS and the value that would be foregone is $12.72.

What are the project IRRs?

Using a spreadsheet, you can find the IRR of both projects to be:

CFS = 17.13%

CFL = 13.95%

What are the project NPVs?

CFS NPV is:

= 675 / 1.0775 + 650 / 1.0775² - 1,050

= $136.31

CFL NPV is:

= 360 / 1.0775 + 360 / 1.0775² + 360 / 1.0775³ + 360 / 1.0775⁴ - 1,050

= $149.03

The value foregone by picking CFS instead of CFL is:

= 149.03 - 136.31

= $12.72

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