Question

You have calculated the NPV and IRR for two investment projects based on the costs and cash flows, but you can only select the best one to choose between project A, and Project B. Based on the following data, which one will you select, and why?

Project A Project B

NPV : $10,000 $9,000

IRR : 10% 12%

Answer 1

Solution:
Project	NPV	Ranking based on NPV	IRR %	Ranking based on IRR
A	10,000	I	10%	II
B	9,000	II	12%	I
Since	Only one project can be selected these projects are mutually exclusive projects , it should be based on NPV Ranking having 1st the Project A , Should be selected.
Ranking	Is given 1st to the project Based on NPV to Project A with highest NPV
	Is given 1st to the project Based on IRR to Project B with highest IRR
Reasoning	As only one project can be selected these projects are mutually exclusive projects .
	The NPV & IRR provides Different Rank.
	The calculation of NPV assumes that the intermediate period cash in flows can be reinvested at cost of capital rate(i.e. required rate of return) and it is always possible.
	The calculation of IRR assumes that the intermediate period cash inflows can be reinvested at IRR (i.e. available rate of return) which is not possible every time.
	The NPV provides the result is absolute amount i.e. present value of net surplus. It can be used to find the increase in amount of wealth .
	It is the IRR provides the percentage annual available return on amount invested.
	The absolute figure has better use than percentage, Due to above reasons the project with better NPV is selected.
Please feel free to ask if anything about above solution in comment section of the question.