Butler Co. is considering two mutually exclusive projects (Project A and Project

Question

Butler Co. is considering two mutually exclusive projects (Project A and Project B) with the following projected cash flows: Year 0 1 2 3 4 Project A cash flows -$10,000 $2,500 $3,500 $4,500 $5,000 Project B cash flows $50,000 $10,000 $16,000 $19,000 $21,000 The WACC for both projects is 8%. Butler performed an analysis of these projects using both the NPV method and the IRR method, with the following results: NPV (Project A) = $2,563 IRR (Project A) = 17.77% NPV (Project B) = $3,495 IRR (Project B) = 10.77% What decision should be made regarding these projects, and why?

Explanation / Answer

Here the answer is that Project B should be considered.

The rule of conflict between IRR and NPV states that,

Whenever there is a conflict(between IRR and NPV) in decision making( to select a project )

we should always go with NPV because the ultimate aim is to increase the shareholder's wealth.

SInce the NPV of project B is more than A, B should be selected.

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