The IRR of normal project X is greater than the IRR of normal project Y, and bot

Question

The IRR of normal project X is greater than the IRR of normal project Y, and both IRR's are greater than zero. (A normal project is defined as having a cash outflow in time 0 and cash inflows in all subsequent periods). Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely be selected, and the investment made, provided we have confidence in the data. Put another way, it is impossible to draw NPV profiles that would suggest not accepting Project X.

True/False? Explain

Explanation / Answer

False

For cost of capital less than the cross over rate (rate at which both NPVs are equal) NPV of X might be less than NPV of Y and hence X might not be accepted. For cost of capital more than the cross over rate NPV of X might be more than NPV of Y and hence X might be accepted.

So, currently, the cost of capital is more than the crossover rate hence both NPV and IRR of X is more than that of Y.

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