You are considering two mutually exclusive projects Project

You are considering two mutually exclusive projects. Project A costs $3.6 million, has a required return of 14.5 percent, and an IRR of 14.3 percent. Project B costs $4.1 million, has a required return of 16 percent, and an IRR of 15.6 percent. Which project(s) should be accepted?

a. project A only

b.project B only

C. Both

D. Neither

Could you explain why?

Solution

Answer is D. Neither

In capital budgeting, IRR is a guidance to evaluate acceptability of a project. By that rule, if IRR > Required Rate of return, then the project is acceptable.

For Project A, IRR < Required Return on Capital

For Project B, IRR < Required Return on Capital

Hence, neither of the projects are economically viable.