Question: You are analyzing two mutually exclusive projects, S and L, whose cash flows (end-of-year) are shown below: Year S L 0 ($1,100) ($1,100) 1 1,000

You are analyzing two mutually exclusive projects, S and L, whose cash flows (end-of-year) are shown below:

Year S L

0 ($1,100) ($1,100)

1 1,000 0

2 350 300

3 50 1,500

The cost of capital for both projects is 12%, and it can get an unlimited amount of capital at that cost.

  1. Compute the internal rate of return for both projects (show up to two decimal points of %).
  2. Draw NPV profiles of Projects S and L on the same graph. The two NPV profiles cross over at the rate of 17.94%. Identify clearly all points on the Y and X axes of each project.
  3. Is a project with a higher IRR between S and L a better investment? Why or why not?
  4. Compute MIRRs for both projects. Do MIRRs support your decision in (c)?

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