0 1 2 3 Project A -$25 $5 $10 $17 Project B -$20 $10 $9 $6 What are the projects

Question

0                      1                       2                      3

Project A         -$25                $5                    $10                  $17

Project B         -$20                $10                  $9                    $6

What are the projects’ IRRs at each of these WACCs? (Yes, I do need IRRs; not MIRRs. I understand that WACCs don't affect the IRRs, but I don't know the answer. Please show how to determine the answer, and the answer.)

WACC = 5%, NPVs:

Project A = 3.52 million; Project B = 2.86 million

WACC = 10%, NPVs:

Project A = .57 million; Project B = 1.04 million

WACC = 15%, NPVs:

Project A = -1.91 million; Project B = -.54 Million

Explanation / Answer

IRR would be similar in all three case as it does not use WACC, BUT MIRR would be different , So IRR in each situation would be same

Project A

IRR is the rate at which NPV is equal to zero i.e

PV of Cash Outflow = PV of Cash Inflow

25 = 5/(1+r) + 10/(1+r)^2 + 17/(1+r)^3

Using trial run & error method

We get

IRR = 11.10%

Using Excel formula

IRR = irr(values)

IRR = irr({-25,5,10,17})

IRR = 11.10%

Project B

IRR is the rate at which NPV is equal to zero i.e

PV of Cash Outflow = PV of Cash Inflow

20 = 10/(1+r) + 9/(1+r)^2 + 6/(1+r)^3

Using trial run & error method

We get

IRR = 13.18%

Using Excel formula

IRR = irr(values)

IRR = irr({-20,10,9,6})

IRR = 13.18 %

Answer

Projects’ IRRs at each of these WACCs

PROJECT A = 11.10%

PROJECT B = 13.18%

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