Question

Langler, Inc., is evaluating two capital projects. Langler has a capital budget of $50 million. Project P has an internal rate of return of 24% and a net present value of $5 million. Project Q has an internal rate of return of 18% and a net present value of $12 million. Project P will cost $15 million, and Project Q will cost $48 million. Based on this information, Langler should accept:

Answer 1

Answer: Project Q

Step-by-step explanation:

If the company can accept only one project, they should accept Project Q because it has a higher net present value than Project P. This is because a higher Net Present value takes precedence to IRR as it discounts cashflows at the company's cost of capital and is already adjusted for cost.

With the company budget at $50 million, accepting Project Q which costs $48 million means that they will be unable to accept Project P. That is fine because Project Q as earlier mentioned, provides a higher NPV.