Question

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 $895.10 $240 $5 $15 Project L -$1,000 $10 $260 $420 $749.71 The company's WACC is 9.0%. What is the IRR of the better project

Answer 1

12.3%

Step-by-step explanation:

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator

project S

Cash flow in year 0 = -$1,000

Cash flow in year 1 = $895.10

Cash flow in year 2 = $240

Cash flow in year 3 =$5

Cash flow in year 4 =$15

IRR = 12.3%

Project L

Cash flow in year 0 = -$1,000

Cash flow in year 1 = 10

Cash flow in year 2 = $260

Cash flow in year 3 =$420

Cash flow in year 4 = 749.71

IRR = 11.7

S is more profitable because the IRR is higher

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.