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tatyana61 [14]
3 years ago
11

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:0 1 2 3 4Project S -$1,000 $895.0

3 $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.
Business
1 answer:
almond37 [142]3 years ago
7 0

Answer:

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.

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

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%

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