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    Question

    ABC Ltd. is evaluating two projects. Project A requires

    ₹50 lakhs investment and offers IRR of 14%. Project B requires ₹40 lakhs and gives IRR of 12%. The cost of capital is 10%, but Project A has longer payback and higher risk. Which approach should guide the decision?
    A Choose Project B for lower risk Correct Answer Incorrect Answer
    B Choose Project A for higher IRR Correct Answer Incorrect Answer
    C Base decision on NPV, not just IRR Correct Answer Incorrect Answer
    D Reject both if risk is present Correct Answer Incorrect Answer

    Solution

    Between mutually exclusive projects, NPV is more reliable than IRR, as IRR can be misleading when project sizes differ or cash flows vary over time.

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