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 $888.61 $260 $10 $5 Project L -$1,000 $10 $260 $380 $793.93 The company's WACC is 8.5%. 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

Company with higher IRR will be better and will be selected.

Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.

Year	Project A	Project B
0	-1000	-1000
1	888.61	10
2	260	260
3	10	380
4	5	793.93
IRR	13.00%	11.70%
Formula	=IRR(select data range)

Project A should be selected.

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