You are considering two mutually exclusive projects. Project A has cash flows of -$125,000, $51,400, $52,900, and $63,300 for Years 0 to 3, respectively. Project B has cash flows of -$85,000, $23,100, $28,200, and $69,800 for Years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Should you accept or reject these mutually exclusive projects based on IRR analysis?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) You should not use IRR; use a different method of analysis.

Question

Quizplus · Accepted Answer

The IRR method may not always provide a reliable decision criterion for mutually exclusive projects because it does not account for differences in project scale and timing of cash flows. It's better to use NPV for comparing mutually exclusive projects, as it directly measures the value added to the firm and accounts for the scale of investment and the time value of money.

You Are Considering Two Mutually Exclusive Projects