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Question:
- Project A:
+ NPV: positive.
+ IRR: 14%.
+ The payback period: 21 months.
- Project B:
+ NPV: negative.
+ IRR: 9%.
+ The payback period: 16 months.
- Project C:
+ NPV: positive.
+ IRR: 16%.
+ The payback period: 18 months.
Project D:
+ NPV: negative.
+ IRR: 16%.
+ The payback period: 13 months.
Which project should be chosen by the project selection committee?
A
Project C.
explanation
Payback period is the least accuracy of all cash flow calculations, so this shouldn’t be taken much consideration if NPV is positive and IRR is greater than 0. Because Project B and Project D both have a negative NPV, they should be excluded. Project C has both a higher IRR and a sooner return on the cash than Project A; therefore, Project C should be the chosen project.
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