medium · Principles of Finance capital-budgeting
A firm is considering two mutually exclusive projects. Project X has an NPV of 50,000 and an IRR of 15%. Project Y has an NPV of 40,000 and an IRR of 20%.
According to standard financial theory, which project should be accepted?
- Project Y, because it offers a higher rate of return on each dollar invested.
- Both projects, as they both have positive NPVs and IRRs above the cost of capital.
- Project X, because it maximizes the absolute addition to shareholder wealth.
- Neither project, as the conflict between NPV and IRR indicates unreliable data.
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