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 $894.10 $250 $5 $5 Project L -$1,000 $0 $250 $380 $820.35 The company's WACC is 9.0%. 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

The project with higher NPV would be a better project.

NPV = Present value of future cash flow discounted at WACC - initial cost

Project S:

NPV = 894.10/(1+0.09)^1 + 250/(1+0.09)^2 + 5/(1+0.09)^3 + 5/(1+0.09)^4 -1000

NPV = 38.10 Answer

Project L:

NPV = 0/(1+0.09)^1 + 250/(1+0.09)^2 + 380/(1+0.09)^3 + 820.35/(1+0.09)^4 - 1000

NPV = 85.01 Answer

Project L would be a better project.

IRR of Project L:

IRR is the rate for which NPV = 0

0 = 0/(1+IRR)^1 + 250/(1+IRR)^2 + 380/(1+IRR)^3 + 820.35/(1+IRR)^4 - 1000

We will use heat trial method to get that value for which above equation satisfies.

IRR = 11.70% Answer