A company is analyzing two mutually exclusive projects, S and L,with the followi

Question

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

                       0                     1                     2                     3                     4

Project S         -$1,000           $900               $250               $10                 $10

Project L         -$1,000           $0                   $250               $$400             $800

The company's WACC is 10 percent. What is the IRR of thebetter project? (Hint: Note that the betterproject may or may not be the one with the higher IRR.)

Explanation / Answer

Project S

Year

Cashflows

IRR =

Project L

Year

Cashflows

IRR =

Calculating InternalRate of Return(IRR):

Project S

Year

Cashflows

0 -$1,000 1 $900 2 $250

IRR =

13.49% 3 $10 4 $10

Project L

Year

Cashflows

0 -$1,000 1 $0 2 $250

IRR =

11.74% 3 $400 4 $800 Calculating IRR using MS-ExcelSpread Sheet: (1) Select a Column for the Project'sCashflows. Select Column "B" (2) Input the Project's Cash flowsstarting from the initial investment and followed by the      Year "0" toYear "4" cashflows, each one in one cell of the column. (3) Click on the Cell where you wantyour IRR Calculated. Select "D5" (4) Enter "=IRR(B1:B5)" and then PressEnter Key. IRR of Project S =13.49% IRR of Project L =11.74%

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