Question

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

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Project S	-$1,000	$887.39	$260	$10	$5
Project L	-$1,000	$5	$250	$400	$833.00

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.

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Answer 1

I have calculated these in Excel. Please take a look at the tables below.

Also, I have first find out the project with better NPV (sum of PVs of all cashflows) at WACC = 9%. I have then found its IRR using IRR function in excel:

Project S

Project L

As seen from the calculations, Project L is the better project in terms of NPV, but the IRR of Project L (12.6%) is less than Project S (12.9%). The IRR of better project in terms of NPV (Project L) is 12.6%.

Hope this answers your question.