I have tried to understand the formula, but I am just not getting it. Could some
ID: 2668201 • Letter: I
Question
I have tried to understand the formula, but I am just not getting it. Could somebody help me step by step? Thank you!
Your division is considering two projects with the following cash flows (in millions)
0 1 2 3
project A -$25 $5 $10 $17
Project B -$20 $10 $9 $6
What are the projects' IRRs at each of the WACCs? (5%, 10%, 15%)
Explanation / Answer
You almost never solve for IRR by hand. You solve for it by setting NPV = 0 0 = C/(1+r)^n + .... Just use the =irr formula in Excel So for project A you get IRR of 11.0976% And for project B you get IRR of $13.17966% The IRR never changes relative to WACC. Rather you compare the two, and you should only accept the project if IRR is > than WACC. For WACC of 5% or 10%, both projects are acceptable. At WACC of 15% neither generates a net profit.