A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: 0 1 2 3 4 Project S Project L -$1,000 $898.99 $240 -$1,000 $5 $10 $0 $260 $420 $732.42 The company's WACC is 9.0%. 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. %

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Question

9. 

Project S requires an initial outlay at t = 0 of $19,000, and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L requires an initial outlay at t = 0 of $28,000, and its expected cash flows would be $12,150 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend?

Select the correct answer.

  a. Project S, because the NPVS > NPVL.  
  b. Neither Project S nor L, because each project's NPV < 0.  
  c. Both Projects S and L, because both projects have IRR's > 0.  
  d. Both Projects S and L, because both projects have NPV's > 0.  
  e. Project L, because the NPVL > NPVS.  
 
10
 
 
A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:
0
1
2
3
4
Project S
Project L
-$1,000 $898.99 $240
-$1,000
$5
$10
$0
$260
$420
$732.42
The company's WACC is 9.0%. 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.
%
Transcribed Image Text:A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: 0 1 2 3 4 Project S Project L -$1,000 $898.99 $240 -$1,000 $5 $10 $0 $260 $420 $732.42 The company's WACC is 9.0%. 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. %
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