Question

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

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 \$873.13 \$240 \$15 \$15 Project L -\$1,000 \$10 \$240 \$380 \$789.15

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.

%

When considering 2 mutually exclusive projects, the project which provides the higher NPV should be selected

 Year Cash flows of project S Cash flows of project L Discounting factors PV of cash flows of project S PV of cash flows of project L 0 -1000 -1000 0.9132 -913.24 -913.24 1 873.13 10 0.8340 728.20 8.34 2 240 240 0.7617 182.80 182.80 3 15 380 0.6956 10.43 264.32 4 15 789.15 0.6352 9.53 501.29 NPV 17.72 43.50

Since the NPV of project L is higher than that of project S, project L is the better project

Calculating IRR of project L ( better project)

 Year Cash flows of project L Discounting factors PV of cash flows of project L 0 -1000 0.9132 -913.24 1 10 0.8340 8.34 2 240 0.7617 182.80 3 380 0.6956 264.32 4 789.15 0.6352 501.29 IRR 1.42%

The IRR of better project(project L) is 1.42%