Question

You are considering two mutually exclusive projects. Based upon risk, the appropriate discount rate for both projects is 10%. The first project has an IRR of 22% and an NPV of $22,432. The second project has an IRR of 12% and an NPV of $24,456. Which project should you select?

accept both projects since both are acceptable.

pick the project with the shorter payback period.

choose the project with the higher NPV.

unable to determine due to insufficient information.

choose the project with the higher IRR.

Answer 1

• NPV rule suggests that the project that should be picked should be with highest positive NPV
• IRR rule suggests that the project that should be picked should be with highest IRR
• When two methods give conflicting results it is suggested that NPV method is always better to go with, as IRR can be misleading and in case of projects with unconventional CFs, there can be multiple IRRs. So it is better to select the second project with higher NPV. So option 2 is the right option
• Nothing is mentioned about the payback period of the two projects So option is incorrect. is
• There is enough information to answer so option 3 is incorrect
• option 4 is incorrect as we need to ignore IRR