CFA Practice Question

CFA Practice Question

Projects A and B both have normal (conventional) cash flows. A's IRR is 7% and B's IRR is 8%. If projects A and B are mutually exclusive, you should select:
A. Project B.
B. Insufficient information.
C. Project A.
Explanation: If you were to use the IRR rule, you would select project B if the project's cost of capital were smaller than 8%. However, you should always use the NPV criterion for selecting projects. Even though B has a higher IRR, it could have a lower NPV at the project's cost of capital. Since this information is missing, you cannot say for sure whether project A is preferable or project B. Indeed, you don't even know if either of the projects has a positive NPV!

User Contributed Comments 3

User Comment
StanleyMo good question.
mishis IRR rule: reject when IRR<cost of capital.
For mutually exclusive projects: If cost of capital > crossover rate, you would accept B .
pstebelp Without access to NPV, I would chose the better IRR!
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