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    Question

    A firm evaluating two mutually exclusive projects uses

    NPV and IRR. Project A has higher NPV but lower IRR than Project B. Which project should be selected and why?
    A Project A, due to higher IRR Correct Answer Incorrect Answer
    B Project B, due to lower NPV risk Correct Answer Incorrect Answer
    C Project A, due to higher wealth creation Correct Answer Incorrect Answer
    D Project B, IRR is a better measure Correct Answer Incorrect Answer

    Solution

    NPV directly measures value addition. For mutually exclusive projects, higher NPV is preferred even if IRR is lower.

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