A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:0 1 2 3 4Project S - $1,000 $895.03 $250 $10 $5Project L - $1,000 $5 $260 $420 $802.50The company's WACC is 10.5%. 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.

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Business

Alyssa

3 January, 01:02

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:0 1 2 3 4Project S - $1,000 $895.03 $250 $10 $5Project L - $1,000 $5 $260 $420 $802.50The company's WACC is 10.5%. 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.

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Answers (1)

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Jazmine Mayo · Answer 1

Project L is the better project as it has higher NPV and its IRR is 12.70%

Explanation:

- NPV of Project S as followed:

-1,000 + 895.03 / (1+10.5%) + 250 / (1+10.5%) ^2 + 10 / (1+10.5%) ^3 + 5 / (1+10.5%) ^4 = $25.5

- NPV of Project L as followed:

-1,000 + 5 / (1+10.5%) + 260 / (1+10.5%) ^2 + 420 / (1+10.5%) ^3 + 802.5 / (1+10.5%) ^4 = $67.

=> Project L is the better Project as it has higher NPV.

The IRR is the discount rate that puts the net present value of project's cash flows to 0 (zero).

- IRR of Project L as followed:

-1,000 + 5 / (1+IRR) + 260 / (1+IRR) ^2 + 420 / (1+IRR) ^3 + 802.5 / (1+IRR) ^4 = 0 IRR = 12.70%