11.12
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 | $887.39 | $260 | $10 | $5 |
Project L | -$1,000 | $10 | $250 | $420 | $780.08 |
The 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.
____%
S:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=887.39/1.105+260/1.105^2+10/1.105^3+5/1.105^4
=1026.77
NPV=Present value of inflows-Present value of outflows
=1026.77-1000
=$26.77(Approx).
L:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=10/1.105+250/1.105^2+420/1.105^3+780.08/1.105^4
=1048.31
NPV=Present value of inflows-Present value of outflows
=1048.31-1000
=$48.31(Approx).
Hence L is better having higher NPV
Let irr be x%
At irr,present value of inflows=present value of outflows.
1000=10/1.0x+250/1.0x^2+420/1.0x^3+780.08/1.0x^4
Hence x=irr=12.1%(Approx).
11.12 IRR AND NPV A company is analyzing two mutually exclusive projects, S and L, with...
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