A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company's required rate of return is 12 percent, and it can get an unlimited amount of funds at that rate.What is the IRR of the better project, i.e., the project which the company should choose if it wants to maximize the price of its stock?

Question

A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below:  The company's required rate of return is 12 percent, and it can get an unlimited amount of funds at that rate.What is the IRR of the better project, i.e., the project which the company should choose if it wants to maximize the price of its stock?

Quizplus · Accepted Answer

To find the IRR of the better project, we need to find the project with the higher NPV. Using a financial calculator or Excel, we find that project S has an NPV of $11,997.33 and an IRR of 16.79%, while project L has an NPV of $19,429.75 and an IRR of 19.08%. Therefore, the better project is L, with an IRR of 19.08%.

A Company Is Analyzing Two Mutually Exclusive Projects, S and L