Question

IRR AND NPV

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

0

1

2

3

4

Project S	-$1,000	$865.46	$260	$10	$15
Project L	-$1,000	$10	$250	$400	$765.87

The company's WACC is 10.0%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.) Round your answer to two decimal places.

%

Answer 1

The better project would be the one with the Higher Net Present Value

Net Present Value = Present Value of Cash Inflows- Present Value of Cash Outflows

Project S :

= 865.46 * 1/(1.10) ^ 1 + $ 260 * 1/(1.10) ^2 + $ 10* 1/(1.10) ^3 + $ 15* 1/(1.10) ^4 - $ 1,000

= $ 19.42

Project L :

= 10 * 1/(1.10) ^ 1 + $ 250 * 1/(1.10) ^2 + $ 400* 1/(1.10) ^3 + $ 765.87* 1/(1.10) ^4 - $ 1,000

= $ 39.33

Since Project L has higher NPV, it is a better project.

Hence IRR of Project L is calculated.

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

1,000= 10/(1.0x) + 250/ (1.0x)^2 + 400/ (1.0x)^3+765.87/ (1.0x)^4

Or x= 11.30%

Hence the IRR is 11.30%