Question

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	$858.80	$260	$15	$15
Project L	-$1,000	$5	$250	$380	$861.23

The company's WACC is 9.0%. 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.

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Answer 1

Project S:

Net Present Value = -$1,000 + $858.80/1.09 + $260/1.09^2 + $15/1.09^3 + $15/1.09^4
Net Present Value = $28.94

Let IRR be i%

Net Present Value = -$1,000 + $858.80/(1+i) + $260/(1+i)^2 + $15/(1+i)^3 + $15/(1+i)^4
0 = -$1,000 + $858.80/(1+i) + $260/(1+i)^2 + $15/(1+i)^3 + $15/(1+i)^4

Using financial calculator, i = 11.49%

Internal Rate of Return = 11.49%

Project L:

Net Present Value = -$1,000 + $5/1.09 + $250/1.09^2 + $380/1.09^3 + $861.23/1.09^4
Net Present Value = $118.55

Let IRR be i%

Net Present Value = -$1,000 + $5/(1+i) + $250/(1+i)^2 + $380/(1+i)^3 + $861.23/(1+i)^4
0 = -$1,000 + $5/(1+i) + $250/(1+i)^2 + $380/(1+i)^3 + $861.23/(1+i)^4

Using financial calculator, i = 12.72%

Internal Rate of Return = 12.72%

Project L is better project as its NPV is higher. Therefore, IRR of better project is 12.72%

answered by: anonymous