Quantitative Methods Q61
| NPV | IRR | Payback Period | |
| A | $22,000 | 7.5% | 4 years |
| B | $30,000 | 8% | 4.5 years |
| C | $25,000 | 12% | 6 years |
Based on the information given, the most appropriate project for Smith’s department is:
- Option : B
- Explanation : Whenever there is a conflict in ranking between the IRR rule and the NPV rule, the NPV rule should be used to decide between mutually exclusive projects. This is because the NPV represents the expected addition to shareholder wealth from an investment. The maximization of shareholder wealth is a basic financial objective of a company and hence, the NPV rule must be given preference. Project B has the highest NPV among the three projects and thus results in the greatest addition to shareholder wealth. While there is a conflict among the NPV and IRR rules for projects B and C, NPV rule is to be given preference for its superiority over IRR and hence B would be the most appropriate choice. Payback period should be given the least consideration as it does not affect the decision due to its various drawbacks.
