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?
    A Select the project with the highest IRR Correct Answer Incorrect Answer
    B Reject both projects Correct Answer Incorrect Answer
    C Select the project with the highest NPV Correct Answer Incorrect Answer
    D Choose the project with lower payback period Correct Answer Incorrect Answer
    E Choose the project with the higher accounting rate of return Correct Answer Incorrect Answer

    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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