Question

1. A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below:
   

   Year	Cash Flow E	Cash Flow F
   0	-$1,100	-$1,100
   1	1,000	0
   2	350	300
   3	50	1500

   
            
   The company's cost of capital is 12 percent, and it can get an unlimited amount of capital at that cost. What is the IRR of the better project?

   		12.00%
   		15.53%
   		18.62%
   		19.08%
   		20.46%

Answer 1

E:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1000/1.12+350/1.12^2+50/1.12^3

=$1207.46

NPV=Present value of inflows-Present value of outflows

=$1207.46-$1100

=$107.46(Approx).

F:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=300/1.12^2+1500/1.12^3

=$1306.83

NPV=Present value of inflows-Present value of outflows

=$1306.83-$1100

=$206.83(Approx).

Hence F is better having higher NPV.

Let irr be x%
At irr,present value of inflows=present value of outflows.

1100 =300/1.0x^2+1500/1.0x^3

Hence x=irr=19.08%(Approx).