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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Two mutually exclusive projects, A and B, have positive NPVs at the firm's cost of capital. Project A has the higher IRR, while Project B has the higher NPV. Which project should a value-maximising firm accept, assuming no capital constraint?

Project B should be accepted. For mutually exclusive projects without capital constraint, NPV measures the absolute addition to shareholder wealth, whereas IRR is only a percentage rate that ignores scale. When rankings conflict, the higher NPV project is chosen.

  1. AProject A, because a higher IRR means a higher return per rupee
  2. BProject B, because it adds more absolute wealth to shareholdersCorrect
  3. CBoth projects, because both have positive NPV
  4. DNeither, because the rankings conflict

Explanation

For mutually exclusive projects the NPV rule is preferred because NPV measures the absolute increase in shareholder wealth. IRR is a percentage and ignores project scale. Accepting both is not possible since the projects are mutually exclusive.

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