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 $896.53 $250 $5 $5 Project L -$1,000 $10 $260 $380 $821.65 The company's WACC is 10.5%. 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 - Looking for 3.459 in PVAF table. The value near to this is found in 6%. HOwever, as the cashflows in the earlier years is higher, NPV may be found between 12% and 13%.

After interpolation, the IRR comes out to be 12.60%

Project L - Looking for 2.718 in PVAF table. The value near to this is found in 16%. However, as the cashflows in the earlier years is lower, NPV may be found between 12% and 13%.

After interpolation IRR comes out to be 12.30%.

Since, NOV of Project L is better than Project S, The IRR of Project L is 12.30%.