If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can conclude that the firm should always select X rather than Y if X has NPV 0.

Question

If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0.

Quizplus · Accepted Answer

The decision to select a project based on IRR when comparing mutually exclusive projects can be misleading. The correct approach is to compare the NPVs of the projects. A project with a higher IRR might have a lower NPV, and since NPV is the direct measure of how much value a project adds to the firm, the project with the higher NPV should be selected, regardless of the IRR comparison.

If the IRR of Normal Project X Is Greater Than