Company B is faced with two mutually exclusive projects, Project X and Project Y. Both projects have positive NPVs, but Project X has a higher NPV than Project Y. However, Project Y's Internal Rate of Return (IRR) is significantly higher than that of Project X. What is the theoretically correct decision, and what is the reason?

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Economics · Capital Budgeting

Verified Solution4 OptionsUpdated: October 2026👁️1 View

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Correct answer

Accept Project X, as the objective is to maximise shareholder wealth, and the project with the highest positive NPV achieves this goal.

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Answer 1

Accept Project Y because the IRR is a direct indicator of project efficiency and return.

Answer 2

Reject both projects until the conflict is resolved, as the IRR and NPV should always rank projects identically.

Answer 3

Accept Project Y because its IRR suggests a quicker payback period, improving short-term liquidity.

Answer 4

Accept Project X, as the objective is to maximise shareholder wealth, and the project with the highest positive NPV achieves this goal.

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