Question

1) Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the best IRR, how much more NPV the project with the better IRR will generate over the project with the inferior IRR? IRR, L 15.58% IRR, S 18.06% WACC: 10.25% 0 1 2 3 4 CFS -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1,554

Answer 1

> NPV

Formula = Present Value of cash inflow (PVCI) - Present Value of cash outflow (PVCO)

> NPV Calculation

Project S

Year	Cash flow	Present Value @ 10.25%
0	-2050	-2050
1	750	680.2721
2	760	625.2539
3	770	574.5859
4	780	527.9347
	NPV	358.05

Project L

Year	Cash flow	Present Value @ 10.25%
0	-4300	-4300
1	1500	1360.5442
2	1518	1248.8624
3	1536	1146.1868
4	1554	1051.8084
	NPV	507.40

> IRR

Formula = To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate (r), which is the IRR.

> Calculation

Project S

Year	Cash flow	Present Value @ 18%
0	-2050	-2050
1	750	635.59
2	760	545.82
3	770	468.65
4	780	402.32
	NPV	2.37

By interpolation the rate of IRR arrives at 18.059 % or 18.6%

Project L

Year	Cash flow	Present Value @ 15%	Present Value @ 16%
0	-4300	-4300	-4300
1	1500	1304.35	1293.10
2	1518	1147.83	1128.12
3	1536	1009.95	984.05
4	1554	888.51	858.26
	NPV	50.62	-36.46

By interpolation, the IRR arrives at 15.577% or 15.58%.

> Answer

Project	IRR	NPV	Remarks
S	18.6%	358.05
L	15.58%	507.40

The project with lower IRR will generate high NPV which equals to 507.40 - 358.05 = 149.35