CAF-7 · Chapter 13 · Question 8 of 15
A business faces a choice between two mutually exclusive projects. Project X has an NPV of Rs. 50,000 and an IRR of 18%. Project Y has an NPV of Rs. 70,000 and an IRR of 14%. The company's cost of capital is 10%. Which project should the company accept?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Project Y, because its absolute NPV is higher
Explanation
When NPV and IRR give conflicting rankings for mutually exclusive projects, the NPV rule must always prevail. NPV measures the absolute increase in shareholder wealth (Rs. 70,000), which is the primary objective of financial management.
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