Question

When choosing between mutually exclusive projects, what is the best method to use?

a. The highest IRR is always the best option.
b. The lowest IRR is always the best option
c. The highest NPV is always the best option
d. The lowest NPV is always the best option
e. The lowest initial Investment is always the best option

Answer 1

Option C. The highest NPV is always the best option.

Step-by-step explanation:

The reason is that IRR assumes that the reinvestment rate is also at IRR which is not a realistic assumption. The Net Present Value resolves this as it assumes that the reinvestment rate is cost of capital and hence is more better than IRR to appraise the project.

The decision rule in the Net present value method is that the project which has higher positive Net present value is regarded as best project among two mutually exclusive projects.