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 | $889.32 | $240 | $10 | $5 |

Project L | -$1,000 | $0 | $250 | $400 | $770.57 |

The company's WACC is 9.5%. 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

IRR of Project S is r, where -1000+889.32/r+240/r^2+10/r^3+5/r^4=0. On solving,r is 11.6%.

IRR of Project L is r, where -1000+0/r+250/r^2+400/r^3+770.57/r^4=0. On solving, r is 11.1%.

To conclude which is a better project, we need to look at NPV of the two projects.

NPV of Project S is -1000+889.32/1.095+240/1.095^2+10/1.095^3+5/1.095^4= 23.42

NPV of Project L is -1000+0/1.095+250/1.095^2+400/1.095^3+770.57/1.095^4= 49.15

So, Project L is better project, as its NPV is higher. So, IRR of better project(project L) is 11.10%

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