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 \$869.52 \$250 \$15 \$10 Project L -\$1,000 \$0 \$260 \$400 \$780.94

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.

%

S:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=869.52/1.095+250/1.095^2+15/1.095^3+10/1.095^4

=1020.97

NPV=Present value of inflows-Present value of outflows

=1020.97-1000

=\$20.97(Approx)

L:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=260/1.095^2+400/1.095^3+780.94/1.095^4

=1064.71

NPV=Present value of inflows-Present value of outflows

=1064.71-1000

=64.71(Approx)

Hence L is better having higher NPV.

Let irr be x%
At irr,present value of inflows=present value of outflows.

1000=260/1.0x^2+400/1.0x^3+780.94/1.0x^4

Hence x=irr=11.6%(Approx).

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