IRR and NPV A company is analyizing two mutually exclusive projects, S and L, wi

Question

IRR and NPV

A company is analyizing two mutually exclusive projects, S and L, with the following cash flows:

                           0               1                2                  3                  4

Project S        -1,000          893.23       240               10                15

Project L        -1000           5                240               400              860.00

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.

Explanation / Answer

the better project is decided on the basis of NPV

NPV of prpject S = -1000+(893.23/1.085^1)+(240/1.085^1=2)+(10/1.085^3)+(15/1.085^4) = $45.775

NPV of project L = -1000+(5/1.085^1)+(240/1.085^2)+(400/1.085^3)+(860/1.085^4) = $142.195

so the better project is L,

1000 = (5/(1+IRR)^1)+(240/(1+IRR)^2)+(400/(1+IRR)^3)+(860/(1+IRR)^4)

ON SOLVING USING HIT AND TRIAL

IRR = 12.899% = 12.9%

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