Question

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: 0 1 2 3 Project S -$1,000 $874.54 $250 $10 $10 Project L -$1,000 $5 $260 $400 $799.76 The company's WACC is 8.0%. 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

IRR is the rate at which NPV is zero

NPV = -initial investment + PV of future cash flows

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

NPV of S = -1000 + 874.54/1.08 + 250/1.08^2 + 10/1.08^3 + 10/1.08^4

= 39.38

NPV of L = -1000 + 5/1.08 + 260/1.08^2 + 400/1.08^3 + 799.76/1.08^4

= 132.92

using excel IRR function

IRR of S = 11.42%

IRR of L = 12.16% ................ans