Final answer:
The better project is determined by calculating the NPV for both projects using the WACC as the discount rate. The project with the higher NPV is the better project. In this case, Project L has a higher NPV, indicating that it is the better project. The IRR of the better project, Project L, is approximately 14.08%.
Step-by-step explanation:
To calculate the IRR (internal rate of return) of the better project, we need to determine the cash flows and use the WACC (weighted average cost of capital) as the discount rate. The IRR is the rate at which the net present value (NPV) of the project is zero. We will calculate the NPV for both projects and determine which one has an IRR closest to zero.
For Project S:
- Year 0: -$1,000
- Year 1: $861.32
- Year 2: $260
- Year 3: $15
- Year 4: $15
For Project L:
- Year 0: -$1,000
- Year 1: $0
- Year 2: $250
- Year 3: $400
- Year 4: $828.32
Using the WACC of 9.5% as the discount rate, we can calculate the NPV for each project:
Project S: NPV = -$1,000 + ($861.32 / (1 + 0.095)^1) + ($260 / (1 + 0.095)^2) + ($15 / (1 + 0.095)^3) + ($15 / (1 + 0.095)^4)
Project L: NPV = -$1,000 + ($0 / (1 + 0.095)^1) + ($250 / (1 + 0.095)^2) + ($400 / (1 + 0.095)^3) + ($828.32 / (1 + 0.095)^4)
Calculating the NPVs, we find:
Project S: NPV ≈ -$421.12
Project L: NPV ≈ $147.25
The project with the higher NPV is the better project. In this case, Project L has a higher NPV, indicating that it is the better project. Therefore, the IRR of the better project is the IRR of Project L. To find the IRR, we can use trial and error or a financial calculator. The IRR of Project L is approximately 14.08%.