Project Q Project R Investment &n

Project Q Project R

Investment 100,000 500,000

IRR 15.5% 12.3%

NPV $5500.00 $6750.00

Profitability Index 1.055 1.014

If the projects are mutually exclusive, which one should be selected? Why?

Expert Solution

Mutually exclusive projects are combination of projects from which only one project can be selected and all other projects are ignored.

On the basis of IRR the project with higher irr should b selected. On the basis of NPV the project with positive NPV should be selected and on the basis of PI the project with higher PI above 1 should be accepted.

Now in the given question Project Q has higher IRR and PI but project R has higher NPV. Under the mutually exclusive projects when there is a conflict between IRR AND NPV project with high NPV should b choosen because irr assumes that all cash flows are reinvested at IRR and multiple IRR may arise for uneven cash flows.

Same is the case for PI when there are mutually exclusive projects project NPV is considered as more reliable than PI.

On the conclusion NPV is considered as more reliable than both PI and IRR therefore even though project R has low IRR and PI since it has high NPV it should be selected.

jeff jeffy answered 6 months ago

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