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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Two mutually exclusive projects of Meera Exports, A and B, each have a life of 5 years. Project A has NPV Rs 80,000 and IRR 18%; Project B has NPV Rs 1,10,000 and IRR 15%. The cost of capital is 12%. Assuming the conflict arises only from differing scale or timing and capital is not rationed, which project should be chosen and why?

Project B should be chosen because it has the higher NPV. When NPV and IRR rank mutually exclusive projects differently, NPV is preferred as it shows the absolute addition to shareholder wealth and assumes reinvestment at the cost of capital, so B's Rs 1,10,000 beats A's Rs 80,000.

  1. AProject A, because its IRR is higher
  2. BProject B, because its NPV is higherCorrect
  3. CProject A, because the IRR always overrides NPV
  4. DNeither, because the IRRs differ

Explanation

For mutually exclusive projects with conflicting rankings, NPV is preferred because it measures the absolute increase in shareholder wealth and assumes reinvestment at the cost of capital. Both IRRs exceed 12%, so both are acceptable, but B adds Rs 30,000 more value. Choosing A on IRR would sacrifice wealth.

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