Question

IRR and NPV 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 $882.76 $260 $5 $5 Project L -$1,000 $0 $250 $400 $775.11 The company's WACC is 8.0%. 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

IRR of project S is higher than project L hence, Project S is better project.

IRR of project S = 12.20% and IRR of project L = 11.20%

IRR is obtained from trial and error method we have to fix such rate for discount that it forces NPV = 0 or sum of all cash flows equal to zero

Project S	Discount rate = IRR = R =	12.20%	Present Values
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$1,000.00	1.000000	-$1,000.00
1	$882.76	0.891265	$786.77
2	$260.00	0.794354	$206.53
3	$5.00	0.707980	$3.54
4	$5.00	0.630998	$3.15
		Total of Present values = NPV =	$0.00

Project L	Discount rate = IRR = R =	11.20%	Present Values
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$1,000.00	1.000000	-$1,000.00
1	$0.00	0.899280	$0.00
2	$250.00	0.808704	$202.18
3	$400.00	0.727251	$290.90
4	$775.11	0.654002	$506.92
		Total of Present values = NPV =	$0.00