Question

Evaluate the following projects. If the projects are mutually exclusive, which project is most likely to be acceptable?

Project	NPV	Payback	IRR	PI
A	1.08m	2 years	9%	1.6
B	0.5m	2.5 years	7%	1.3
C	0.15m	2 years	7%	1.05

B

A and B

C

A

Answer 1

As the projects are mutually exclusive, we can invest only in one project and will have to let go of all other projects. Even if all the projects have a positive NPV we can only select one project out of the three given options.

Project A has the highest NPV, the highest IRR, and the lowest payback period. Hence we will select project A over the other two.

To take a decision on mutually exclusive projects. the project with the highest NPV should be selected. You should first look at the NPV of any project rather than the IRR because of the drawbacks that it holds. The lowest payback period project is also considered above others with a higher payback period. In our questions as a project, A holds all the 3 requirements i.e. highest NPV, lowest payback, and highest IRR, we will select project A.

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