When considering both NPV and IRR, which statement is true with regards to selecting a project? Group of answer choices You should only choose a project if both the NPV and the IRR are higher than those of the alternative project. You should choose the project with the higher IRR even if it has the lower NPV. You should always choose the project with the higher IRR. You should choose the project with the higher NPV even if it has the lower IRR.

Question

Kirsten Cross

Business

11 February, 05:05

When considering both NPV and IRR, which statement is true with regards to selecting a project? Group of answer choices You should only choose a project if both the NPV and the IRR are higher than those of the alternative project. You should choose the project with the higher IRR even if it has the lower NPV. You should always choose the project with the higher IRR. You should choose the project with the higher NPV even if it has the lower IRR.

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Dwayne Davis · Answer 1

You should choose the project with the higher NPV even if it has the lower IRR.

Explanation:

When you have to choose between two mutually exclusive projects, the net present factor (NPV) is the item to consider. You should always choose only projects with a positive NPV, and if both have positive NPVs, then choose the one with the highest. The internal rate of return (IRR) has a serious flaw, it assumes that cash flows are reinvested at the same rates, and that is usually not true in the real world. The IRR is subject to reinvestment risk, which means that it is likely that future cash flows generated by the project will not generate the same rate of returns.