If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal),we can conclude that the firm should select X rather than Y if X has NPV 0.

Question

If the IRR of normal Project X is greater than the IRR of mutually exclusive Project Y (also normal),we can conclude that the firm should select X rather than Y if X has NPV > 0.

Quizplus · Accepted Answer

The decision to select Project X over Project Y based solely on a higher IRR can be misleading if not considering the scale of investment, timing of cash flows, and cost of capital. NPV should be the primary criterion for project selection, especially for mutually exclusive projects, as it directly measures the value added to the firm. A project with a higher NPV is generally preferred, regardless of its IRR compared to another project.

If the IRR of Normal Project X Is Greater Than