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 \$886.61 \$260 \$5 \$10 Project L -\$1,000 \$5 \$260 \$420 \$724.69

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.

%

S:

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

=886.61/1.09+260/1.09^2+5/1.09^3+10/1.09^4

=\$1043.19

NPV=Present value of inflows-Present value of outflows

=\$1043.19-\$1000

=\$43.19(Approx).

L:

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

=5/1.09+260/1.09^2+420/1.09^3+724.69/1.09^4

=\$1061.13

NPV=Present value of inflows-Present value of outflows

=\$1061.13-\$1000

=\$61.13(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+260/1.0x^2+420/1.0x^3+724.69/1.0x^4

Hence x=irr=11%(Approx).

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