Question

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

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1

2

3

4

Project S	-$1,000	$882.23	$260	$15	$5
Project L	-$1,000	$5	$240	$400	$817.44

The company's WACC is 10.5%. 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 place

Answer 1

Calculating IRR of both Project using EXCEL FUNCTION:-

IRR of Project S is 12.80%

IRR of Project L is 12.00%

As WACC is 10.50% which is less than IRR in both case. Thus, the better Project is the one providing higher Internal Rate of Return(IRR) which is Project A

IRR of Better Project is 12.80%