Question

Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct?

a.

Both projects have a positive net present value (NPV).

b.

Project A must have a higher NPV than project B.

c.

If the required return were less than 12 percent, Project B would have a higher IRR than Project A.

d.

Project B has a higher profitability index than Project A.

Answer 1

If there are internal rate of return of two projects given, then that project which have a higher internal rate of return is having better level of rate of return to the company and it will be generating a higher amount of net cash flows.

So, it can be said that project A will be having higher net present value because it is having a higher internal rate of return and if the internal rate of return is higher than the required rate of return, it will mean that it is having a positive net present value and it is also beating the the other project in terms of internal rate of return, so it is having a higher net cash flows and higher net present value and higher profitability index than project B.

Correct answer would be option (B) Project A must have a higher NPV than project B