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	$880.44	$260	$10	$15
Project L	-$1,000	$5	$260	$380	$819.40

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	880.44	260	10	15
Discounting factor	1	1.09	1.1881	1.295029	1.4115816
Discounted cash flows project	-1000	807.7431	218.8368	7.721835	10.626378
NPV = Sum of discounted cash flows
NPV Project S =	44.93
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	5	260	380	819.4
Discounting factor	1	1.09	1.1881	1.295029	1.4115816
Discounted cash flows project	-1000	4.587156	218.8368	293.4297	580.48362
NPV = Sum of discounted cash flows
NPV Project L =	97.34
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	0.129000702
Year	0	1	2	3	4
Cash flow stream	-1000	880.44	260	10	15
Discounting factor	1	1.129001	1.274643	1.439072	1.6247137
Discounted cash flows project	-1000	779.8401	203.9787	6.948921	9.2323957
NPV = Sum of discounted cash flows
NPV Project S =	0.000148002
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	12.90%
Project L
IRR is the rate at which NPV =0
IRR	0.121000757
Year	0	1	2	3	4
Cash flow stream	-1000	5	260	380	819.4
Discounting factor	1	1.121001	1.256643	1.408697	1.5791509
Discounted cash flows project	-1000	4.4603	206.9005	269.7527	518.88646
NPV = Sum of discounted cash flows
NPV Project L =	4.2803E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	12.10%

Project L has higher NPV, IRR is 12.1%