General Studies · Capital Budgeting
A consortium is planning a large-scale project and evaluating two mutually exclusive proposals: Proposal X requires an initial outlay of 5,000 million with cash inflows of 1,500 million for 5 years, while Proposal Y requires 8,000 million with cash inflows of 2,400 million for 5 years. Assuming a discount rate of 12 percent, which of the following statements most accurately reflects the conflict between Net Present Value (NPV) and Internal Rate of Return (IRR) in this scenario?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1IRR is the superior method in this case because it provides a percentage return which is more useful for comparing projects of varying sizes.
- 2The Profitability Index will yield the same ranking as the NPV method because both are absolute measures of value creation.
- 3Proposal Y may have a higher NPV but a lower IRR compared to Proposal X, creating a ranking conflict because IRR assumes reinvestment at the internal rate while NPV assumes reinvestment at the cost of cap ital.✓
- 4Proposal X will always be preferred by IRR because it has a lower initial investment requirement than Proposal Y, regardless of cash flow timings.
Correct answer
Proposal Y may have a higher NPV but a lower IRR compared to Proposal X, creating a ranking conflict because IRR assumes reinvestment at the internal rate while NPV assumes reinvestment at the cost of cap ital.
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