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 $910.23
$240 $5 $5

Project L -$1,000 $5
$240 $420 $823.16

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

S:

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

=910.23/1.09+240/1.09^2+5/1.09^3+5/1.09^4

=$1044.48

NPV=Present value of inflows-Present value of outflows

=$1044.48-$1000

=$44.48(Approx).

L:

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

=5/1.09+240/1.09^2+420/1.09^3+823.16/1.09^4

=$1114.05

NPV=Present value of inflows-Present value of outflows

=$1114.05-$1000

=$114.05(Approx).

Hence L is better having higher NPV.

Let irr be x%

At irr,present value of inflows=present value of outflows.

1000 =5/1.0x+240/1.0x^2+420/1.0x^3+823.16/1.0x^4

Hence x=**irr=12.6%(Approx).**

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