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	$877.09	$250	$5	$10
Project L	-$1,000	$10	$260	$420	$744.72

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
IRR is the rate at which NPV =0
IRR	11.30%
Year	0	1	2	3	4
Cash flow stream	-1000.000	877.090	250.000	5.000	10.000
Discounting factor	1.000	1.113	1.239	1.379	1.535
Discounted cash flows project	-1000.000	788.043	201.814	3.626	6.517
NPV = Sum of discounted cash flows
NPV Project S =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	11.30%

Project L
IRR is the rate at which NPV =0
IRR	11.60%
Year	0	1	2	3	4
Cash flow stream	-1000.000	10.000	260.000	420.000	744.720
Discounting factor	1.000	1.116	1.245	1.390	1.551
Discounted cash flows project	-1000.000	8.961	208.759	302.174	480.106
NPV = Sum of discounted cash flows
NPV Project L =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	11.60%

Project L is better project as it has a higher IRR of 11.6%