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 $882.86 $240 $15 $5 Project L -$1,000 $0 $260 $420 $740.50 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

Cash flow for project S is:
Year 0:-$1000
Year 1:$882.86
Year 2:$240
Year 3:$15
Year 4:$5

Cash flow for project L is:
Year 0:-$1000
Year 1:$0
Year 2:$260
Year 3:$420
Year 4:$740.50
First we need to determine the net present values (NPV) of the projects using WACC and then we need determine the IRR of the project with higher NPV.
We can determine the NPV of the projects using excel.

The NPV of project S is $27.09
The NPV of project L is $67.74

We see that, project L is the better project with higher NPV. So, IRR of project L is 11.20%