IRR AND NPV A company is analyzing two mutually exclusive pr

IRR AND NPV A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: Project s $1,000 $880.62 $250 $10 $15 Project L $1,000 $$250 $420 $768.70 The company\'s WACC s 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 dec mal places

Solution

The better project is the one with the higher Net Present Value

Project S:

Net Present Value = 880.62 * 1/(1.08) ^ 1 + $ 250 * 1/(1.08) ^2+ $ 10* 1/(1.08) ^3 +$ 15* 1/(1.08) ^4 - $ 1000

= $ 48.69

Project L:

Net Present Value = 5* 1/(1.08) ^ 1 + $ 250 * 1/(1.08) ^2+ $ 420 * 1/(1.08) ^3 +$ 768.70* 1/(1.08) ^4 - $ 1000

= $ 117.39

Since Project L has higher Net Present Value, the IRR of Project L is computed:

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

1,000 =5 /(1.0x) + 250 / (1.0x)^2 + 420 / (1.0x)^3+768.70/ (1.0x)^7

Or x= 11.70%

Hence the IRR is 11.70%