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 | $874.19 | $260 | $5 | $5 |

Project L |
-$1,000 | $0 | $240 | $400 | $792.04 |

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.

%

Answer #1

S:

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

=874.19/1.095+260/1.095^2+5/1.095^3+5/1.095^4

=$1022.48

NPV=Present value of inflows-Present value of outflows

=$1022.48-$1000

=$22.48(Approx).

L:

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

=240/1.095^2+400/1.095^3+792.04/1.095^4

=$1055.75

NPV=Present value of inflows-Present value of outflows

=$1055.75-$1000

=$55.75(Approx).

Hence L is better having higher NPV.

Let irr be x%

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

1000 =240/1.0x^2+400/1.0x^3+792.04/1.0x^4

Hence x=**irr=11.3%(Approx).**

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