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 | $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.

%

Answer #1

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%

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$240
$15
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Project L
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1
2
3
4
Project S
-$1,000
$868.62
$260
$15
$15
Project L
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$0
$250
$380
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better project? (Hint: The better project may or may not
be the one with the higher IRR.) Round your answer to two decimal
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with the following cash flows:
0
1
2
3
4
Project S
-$1,000
$858.80
$260
$15
$15
Project L
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$5
$250
$380
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0
1
2
3
4
Project S
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$869.52
$250
$15
$10
Project L
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$0
$260
$400
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better project? (Hint: The better project may or may not
be the one with the higher IRR.) Round your answer to two decimal
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0
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3
4
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