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?© BrainMass Inc. brainmass.com October 10, 2019, 5:15 am ad1c9bdddf
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 ...
The solution selects the investment projects based upon capital budgeting methods.