Question

A company is analyzing two mutually exclusive projects, P and D, with the following cash flows:

0 1 2 3 4

Project P -$1,000 $872.56 $250 $10 $10

Project D -$1,000 $0 $260 $380 $863.80

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 P
	Statement Computing NPV	in $
Year	Cash Inflows	Discount factor 9%	Discounted Value
0	-1000.00	1.000	-1000.00
1	872.56	0.917	800.51
2	250.00	0.842	210.42
3	10.00	0.772	7.72
4	10.00	0.708	7.08
		NPV	25.74

	Project D
	Statement Computing NPV	in $
Year	Cash Inflows	Discount factor 9%	Discounted Value
0	-1000.00	1.000	-1000.00
1	0.00	0.917	0.00
2	260.00	0.842	218.84
3	380.00	0.772	293.43
4	863.80	0.708	611.94
		NPV	124.20

Since NPV of Project D is Higher hence Project D is the Better Project

	IRR Of Project D
	Discounting The Flows with 15% Rate
Year	Cash Inflows	Discount factor 9%	Discount factor 15%	Discounted Value 9%	Discounted Value 15%
0	-1000.00	1.000	1.000	-1000.00	-1000.00
1	0.00	0.917	0.870	0.00	0.00
2	260.00	0.842	0.756	218.84	196.60
3	380.00	0.772	0.658	293.43	249.86
4	863.80	0.708	0.572	611.94	493.88
			NPV	124.20	-59.67
			Difference in NPV	183.87
		IRR = 9% + 6%*124.20/183.87
		IRR = 13.053%