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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

IRR AND NPV A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

images

The company’s WACC is 8.5%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.)

Summary Introduction

To calculate: The IRR of the better project.

Introduction:

Net Present Value (NPV):

It is a method under capital budgeting which includes the calculation of net present value of the project in which a company is investing. The calculation is done by calculating the difference between the value of cash inflow and value of cash outflow after considering the discounted rate.

Internal Rate of Return (IRR):

It refers to the rate of return that is computed by the company to make a decision regarding the selection of a project for investment. This rate provides the basis for selection of projects with lower cost of capital and rejection of project with higher cost of capital.

Explanation

The calculation of NPV and IRR of Project S on a spreadsheet is:

Table (1)

The NPV of the project S is $51.82 and IRR is 12.85%.

The calculation of NPV and IRR of Project L on a spreadsheet is:

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