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	$885.70	$250	$5	$15
Project L	-$1,000	$5	$250	$380	$813.38

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

calculation of Net Present Value (NPV) of both projects

Project S:

year	cashflows $	Present value factor @ 9 % = 1/(1+r)n	discounted cash flows $
1	885.7	0.9174	812.541
2	250	0.8416	210.40
3	5	0.7722	3.861
4	15	0.7084	10.626
		TOTAL	1037.428

NPV = Disc.cash inflows - Disc. cash outflows= 1037.428 - 1000 = $ 37.428

Project L:

year	cashflows $	Present value factor @ 9 % = 1/(1+r)n	discounted cash flows $
1	5	0.9174	4.587
2	250	0.8416	210.4
3	380	0.7722	293.436
4	813.38	0.7084	576.198
		TOTAL	1084.621

NPV = Disc.cash inflows - Disc. cash outflows= 1084.621 - 1000 = $ 84.621

Since The NPV of the Project L is high it is more beneficial.

Calculation of IRR Internal rate of return of Project L:

IRR is the value

year	cashflows $	Present value factor @11.4 % = 1/(1+r)n	discounted cash flows $
1	5	0.8976	4.488
2	250	0.8058	201.45
3	380	0.7233	274.854
4	813.38	0.6493	528.13
		TOTAL	1008.92

IRR is the rate at which the NPV is zero. when Discounted inflow and outflow becomes equal

at 11.4% the value of Discounted cash inflow is 1008.92 approximately the value of IRR will be 11.4 to 11.5