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	$885.37	$250	$15	$15
Project L	-$1,000	$5	$240	$380	$844.53

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

Sol:

To compute IRR, we first have to find NPV (Net present value) of each projects. The project with higher NPV is better.

Year	Project S cash flows	Project L cash flows	PV factor @8%	PV of Project S	PV of Project L
0	-1000	-1000	1	-1000	-1000
1	885.37	5	0.93	819.79	4.63
2	250	240	0.86	214.33	205.76
3	15	380	0.79	11.91	301.66
4	15	844.53	0.74	11.03	620.75
IRR	12.90%	12.10%	NPV	57.05	132.80

If the project are mutually exclusive, then better project is one which has higher NPV. Project L has higher NPV of 132.80 and should be accepted. Therefore IRR of the better project is project L with 12.10%

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