IRR AND NPV
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 | $886.38 | $250 | $15 | $10 |
Project L | -$1,000 | $0 | $240 | $400 | $843.31 |
The company's WACC is 9.0%. 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.
%
S:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=886.38/1.09+250/1.09^2+15/1.09^3+10/1.09^4
=1042.28
NPV=Present value of inflows-Present value of outflows
=1042.28-1000
=$42.28(Approx).
L:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=240/1.09^2+400/1.09^3+843.31/1.09^4
=1108.30
NPV=Present value of inflows-Present value of outflows
=1108.30-1000
=$108.30(Approx).
Hence L is better having higher NPV.
Let irr be x%
At irr,present value of inflows=present value of outflows.
1000=240/1.0x^2+400/1.0x^3+843.31/1.0x^4
Hence x=irr=12.40%(Approx).
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> how did you find irr?
marquez Sun, Nov 21, 2021 11:09 AM