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Choosing the best investment proposal

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Just One, Inc. has two mutually exclusive investment projects P & Q, shown below. Suppose the interest rate is 10%.

Project Investment Year 1 Year 2 IRR NPV(r=10%)
P -200.00 140 128.25 22.4% 33.26
Q -100.00 80.00 56.25 25.0% 19.21

The ranking of projects differs on the use of IRR or NPV measures. Which project should be selected? Why is the IRR ranking misleading?

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Solution Summary

The solution selects the investment projects based upon capital budgeting methods.

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In the given scenario,

NPV of project P=$33.36
NPV of project Q=$19.21

Since NPV of Project P is higher, NPV criteria gives ranking 1 to Project P and ranking 2 to Project Q.

IRR of project P=22.4%
IRR of project Q=25.0%
Since IRR of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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