Consider two mutually exclusive projects A & B.If you subtract the cash flows of opportunity B from the cash flows of opportunity A,then you should:
A)take opportunity A if the regular IRR exceeds the cost of capital.
B)take opportunity A if the incremental IRR exceeds the cost of capital.
C)take opportunity B if the regular IRR exceeds the cost of capital.
D)take opportunity B if the incremental IRR exceeds the cost of capital.

Question

Quizplus · Accepted Answer

Subtracting cash flows of opportunity B from the cash flows of opportunity A gives us incremental cash flows. Therefore, we should use the incremental IRR to make a decision. If the incremental IRR is greater than the cost of capital, then we should choose opportunity A. Otherwise, we should choose opportunity B. Therefore, the correct choice is B, take opportunity A if the incremental IRR exceeds the cost of capital.

Consider Two Mutually Exclusive Projects a & B