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Assume there are two competing projects, X and Y. Project X has a NPV of $1,500 and an IRR of 16%. Project Y has a NPV of $1,000 and an IRR of 20%. Which of the following is true? a. Neither project should be chosen. b. It is not possible to choose between the two projects. c. Project Y should be chosen because it has a higher IRR. d. Project X should be chosen because it has a higher NPV.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 19, Problem 21E
Textbook Problem
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Assume there are two competing projects, X and Y. Project X has a NPV of $1,500 and an IRR of 16%. Project Y has a NPV of $1,000 and an IRR of 20%. Which of the following is true?

  1. a. Neither project should be chosen.
  2. b. It is not possible to choose between the two projects.
  3. c. Project Y should be chosen because it has a higher IRR.
  4. d. Project X should be chosen because it has a higher NPV.

To determine

Identify the correct option for the given statement.

Explanation of Solution

Net present value method (NVP): Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Internal rate of return method (IRR): Internal rate of return method is one of the capital investment methods which determine the rate of return, wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method is also called as the time-adjusted rate of return method. It used to evaluate the different proposal’s expected rate of return.

From the net present value (NPV) perspective, Project X is better for the investment, because Project X has higher net present value ($1,500) than Project Y ($1,000)...

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Chapter 19 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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