Question

11.  Problem 11.12 (IRR and NPV)

eBook Problem Walk-Through 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 $883.47 $260 $15 $5 Project L -$1,000 $5 $260 $400 $820.32 The company's WACC is 8.5%. 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:

To find the NPV, we need to put the following values in the financial calculator:

CF0 = -1000; C01 = 883.47; F01 = 1; C02 = 260; F02 = 1; C03 = 15; F03 = 1; C04 = 5; F04 = 1;

Press NPV, then put I = 8.5, then press down key and then CPT, which gives 50.47

So, NPV of Project S is $50.47

To find the IRR, we need to put the following values in the financial calculator:

CF0 = -1000; C01 = 883.47; F01 = 1; C02 = 260; F02 = 1; C03 = 15; F03 = 1; C04 = 5; F04 = 1;

Press IRR, then CPT, which gives 12.90

So, IRR of Project S is 12.90%

Project L:

To find the NPV, we need to put the following values in the financial calculator:

CF0 = -1000; C01 = 5; F01 = 1; C02 = 260; F02 = 1; C03 = 400; F03 = 1; C04 = 820.32; F04 = 1;

Press NPV, then put I = 8.5, then press down key and then CPT, which gives 130.55

So, NPV of Project S is $130.55

To find the IRR, we need to put the following values in the financial calculator:

CF0 = -1000; C01 = 5; F01 = 1; C02 = 260; F02 = 1; C03 = 400; F03 = 1; C04 = 820.32; F04 = 1;

Press IRR, then CPT, which gives 12.60

So, IRR of Project L is 12.60%

Project L is a better project as it has a higher NPV, and its IRR is 12.60%