You are told that the recommended project is B. becaues it has the highest NPV.
ID: 2802921 • Letter: Y
Question
You are told that the recommended project is B. becaues it has the highest NPV. What 4 questions should you ask before agreeing to this decision Project Cash Flows Time 0 ($200,000) (S400,000) ($100,000) ($1,000,000) $80,000 $100,000 $50,000 $320,000 $60,000 $100,000 $50,000 320,000 $50,000 $100,000 $50,000 $320,000 $40,000 $100,000 530,000 $100,000 $320,000 $2 0,000 $100,000 Summary of Project Evaluation NPV IRR MIRR 17,117 35,526 24,343 14,357 13.65% 12.98% 23.38% 10.66% 8.62% 9.25% 16.38% 8.37%Explanation / Answer
Capital budgeting decision should not be based on NPV only. More realistic decision could be taken through IRR and MIRR analysis.
Four questions are as below:
1. What is the IRR of project B?
2. What are the IRRs of other alternatives? Only the highest IRR should be considered.
3. What are the MIRRs of B and the other alternatives?
4. Are the highest IRR and the highest MIRR in same project? In such case that highest figures should be considered.
Based on the above questions, project B should not be recommended although it has the highest NPV. Project C should be recommended, because its IRR and MIRR are the highest.
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