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 | $871.66 | $250 | $15 | $5 |

Project L | -$1,000 | $5 | $260 | $400 | $753.16 |

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

NPV of Project S =[ 871.66*1/(1.09)^1+250*1/(1.09)^2+15*1/(1.09)^3+5*1/(1.09)^4]-1000

= $ 25.23

NPV of Project L =[ 5*1/(1.09)^1+260*1/(1.09)^2+400*1/(1.09)^3+753.16*1/(1.09)^4]-1000

= $ 65.85

Since the NPV of Project L is higher, it is the better project.

IRR of Project L:

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

1,000 = 5/(1.0x) +260/ (1.0x)^2 +400/(1.0x)^3+ 753.16/(1.0x)^4

Or x= 11.14%

Hence the IRR is
**11.14%**

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