Question

11) Your company is choosing between two MUTUALLY EXCLUSIVE projects that have a required rate of...

11) Your company is choosing between two MUTUALLY EXCLUSIVE projects that have a required rate of return of 8.25%. You have gathered the following data. Which of the project(s) should be accepted?

 IRR NPV Project A 6.40% \$ 22.6 million Project B 8.50% \$ 16.1 million

A) Accept neither project, as both have a required return that is above the IRR.

B) Accept project B with the higher IRR.

C) Accept project A with the higher NPV.

D) Accept both projects, as both have a positive NPV.

E) Accept both projects, as both have a positive NPV and an IRR greater than the required return.

Ans. B. Accept Project B with the higer IRR

Now lets understand both the projects.

The IRR of the project is 6.40% which is lower than the required rate of return of 8.25% so in that terms it should not be taken but we see that the NPV of the project is \$ 22.6 million which is higher than the \$16.1 million of Project B but here NPV might be greater but the returns against the investment in percentage terms would not be higher so we would be better off to invest in Project B which has a higher IRR than the required rate of return of 8.25%.