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as we are taught in the classes if the project is mutually exclusive, we only have to choose higher NPV
but what if
P1 – NPV = 230, IRR = 50%
P2 – NPV = 231. IRR = 20%
which project you are going to choose project 1 or project 2????
please tag sanjay Sir, so he can answer us
sir, please clear this doubt
In case of mutually exclusive- choose project with high NPV. NPV shows wealth creation in absolute term- so by choosing project 2 we will create more wealth for our investors !!
Whenever there is a choice comes to choose between high NPV or high IRR- choose High NPV project !!
Now if there are 2 independent project – and same NPV IRR as you mentioned- we will again choose high NPV project. But suppose if NPV of both project are same then we will choose high IRR project !!
Heirarchy should be (this isn’t mentioned anywhere- I build this for my understanding which I’m sharing with you)
High NPV, High IRR
High NPV, Low IRR
Low NPV, High IRR
Low NPV, Low IRR
in your question project 2 is High NPV, Low IRR & project 1 is Low NPV, High IRR
So heirarchy wise project 2 is ranked higher and therefore acceptable !!
(If there isn’t any budget contraint and both project are independent then we will choose both project as both project will create wealth for our investors !!)
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