Homework SourseIRR 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:
The company\'s WACC is 9.5%. 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.
________ %
| 0 | 1 | 2 | 3 | 4 |
Solution
Project S
NPV of S = 32.32
IRR = 12.40%
Project L
NPV = 68.27
IRR = 11.70%.
Since NPV of L is higher it is a better project. So IRR of better project is 11.70%
| Discount rate | 9.5000% | ||
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
| (1,000.00) | 0 | (1,000.00) | (1,000.00) |
| 894.100 | 1 | 816.53 | (183.47) |
| 250.000 | 2 | 208.50 | 25.03 |
| 5.000 | 3 | 3.81 | 28.84 |
| 5.000 | 4 | 3.48 | 32.32 |
