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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 Preview

    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 Summary

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