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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Zenith Logistics is comparing two mutually exclusive warehouse automation projects. Project A has an NPV of $420,000 and an IRR of 14%. Project B has an NPV of $510,000 and an IRR of 12%. The company's cost of capital is 10%. Which decision is consistent with maximising shareholder wealth?

Project B should be chosen because NPV measures the absolute increase in shareholder wealth, and Project B's $510,000 exceeds Project A's $420,000. IRR is a percentage and can mislead when ranking mutually exclusive projects of differing scale or timing, so the higher IRR does not decide the choice.

  1. AChoose Project A because its IRR is higher
  2. BChoose Project B because its NPV is higherCorrect
  3. CChoose both projects because both IRRs exceed the cost of capital
  4. DChoose Project A because it must have the shorter payback period

Explanation

For mutually exclusive projects, NPV is the preferred criterion because it measures the absolute increase in shareholder wealth. IRR is a relative percentage and can rank projects wrongly when scale or cash flow timing differs. Project B adds $90,000 more value. Payback cannot be inferred from the data given.

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