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.

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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%