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Answer: Choose Project 1 due to its higher NPV.
When selecting between mutually exclusive projects where NPV and IRR rankings conflict, the **NPV criterion** is the theoretically sound and preferred method. This is because NPV directly measures the increase in shareholder wealth. While IRR and other metrics like ROIC can be calculated, NPV provides the most reliable basis for decision-making. Options B and C are incorrect as they either prioritize IRR (B) or suggest indifference (C), neither of which aligns with the NPV rule.
Author: LeetQuiz Editorial Team
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A company is evaluating two mutually exclusive projects, both with positive net present values (NPVs). Project 1 has a higher NPV but a lower internal rate of return (IRR) compared to Project 2. In this scenario, the company should:
A
Choose Project 1 due to its higher NPV.
B
Choose Project 2 due to its higher IRR.
C
Be indifferent between Project 1 and Project 2.