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 $888.12 $260 $10 $5

Project L -$1,000 $5 $260 $420 $785.20

The company's WACC is 10.0%. What is the IRR of the better project?

Answer 1

We will use the BA 2 Plus financial calculator to find the IRR of the proejcts. Please make the following strokes on your calculator-

For project S,

CF

2ND CE|C

CFo = -1,000

Down arrow

CO1 = 888.12

Down arrow (2)

CO2 = 260

Down arrow (2)

CO3 = 10

Down arrow (2)

CO4 = 5

IRR CPT

IRR = 12.96%

Similarly, IRR for Project L is 12.33%

Both projects have an IRR above the WACC. As they are mutually exclusive, we will select project with higher IRR i.e. PROEJCT S.

Do let me know in the comment section in case of any doubt.