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	$871.20	$260	$5	$10
Project L	-$1,000	$0	$250	$400	$806.80

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

Project S
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1000	871.2	260	5	10
Discounting factor	1	1.09	1.1881	1.295029	1.4115816
Discounted cash flows project	-1000	799.2661	218.8368	3.860917	7.0842521
NPV = Sum of discounted cash flows
NPV Project S =	29.05
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project L
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1000	0	250	400	806.8
Discounting factor	1	1.09	1.1881	1.295029	1.4115816
Discounted cash flows project	-1000	0	210.42	308.8734	571.55746
NPV = Sum of discounted cash flows
NPV Project L =	90.85
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project S
IRR is the rate at which NPV =0
IRR	0.11550144
Year	0	1	2	3	4
Cash flow stream	-1000	871.2	260	5	10
Discounting factor	1	1.115501	1.244343	1.388067	1.5483907
Discounted cash flows project	-1000	780.9941	208.9455	3.602132	6.4583185
NPV = Sum of discounted cash flows
NPV Project S =	3.86758E-05
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	11.55%
Project L
IRR is the rate at which NPV =0
IRR	0.118899466
Year	0	1	2	3	4
Cash flow stream	-1000	0	250	400	806.8
Discounting factor	1	1.118899	1.251936	1.400791	1.5673438
Discounted cash flows project	-1000	0	199.6907	285.553	514.75624
NPV = Sum of discounted cash flows
NPV Project L =	3.49326E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	11.89%

Project L has higher NPV and its IRR is 11.89%