Question
XYZ Ltd. is evaluating a project that requires an
initial investment of ₹10 crore. The expected cash inflows over the next 5 years are uneven. The company uses a discount rate of 10%. The project has a positive NPV of ₹1.5 crore, but the IRR is only marginally above the cost of capital. Meanwhile, another project offers a higher IRR but lower NPV. What should the company prioritize if it wants to maximize shareholder wealth?Solution
NPV directly reflects the value addition to the shareholders’ wealth. Even if IRR is higher for the other project, the project with higher NPV is preferred in value maximization.
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