IRR

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KaurP
Participant
Posts: 94
Joined: Wed Apr 04, 2018 4:08 am

IRR

Hi Manish,

Based on the information provided below, which project would you recommend pursuing?

Project I, with BCR (Benefit Cost ratio) of 1:1.6;
Project II, with NPV of US \$ 500,000;
Project III, with IRR (Internal rate of return) of 15%
Project IV, with opportunity cost of US \$ 500,000.

A. Project I
B. Project III
C. Either project II or IV
D. Can not say from the data provided

Explanation: Project III has an IRR of 15 percent, which means the revenues from the project equal the cost expended at an interest rate of 15 percent. This is a definitive and a favorable parameter, and hence can be recommended for selection.

We select the project with high BCR, NPV, IRR however no data for comparison in the question. Option 'B' has been marked as correct answer. Can you explain this..
manishpn
Expert
Posts: 2795
Joined: Sat Jan 04, 2014 3:55 pm

Re: IRR

KaurP wrote:Hi Manish,

Based on the information provided below, which project would you recommend pursuing?

Project I, with BCR (Benefit Cost ratio) of 1:1.6;
Project II, with NPV of US \$ 500,000;
Project III, with IRR (Internal rate of return) of 15%
Project IV, with opportunity cost of US \$ 500,000.

A. Project I
B. Project III
C. Either project II or IV
D. Can not say from the data provided

Explanation: Project III has an IRR of 15 percent, which means the revenues from the project equal the cost expended at an interest rate of 15 percent. This is a definitive and a favorable parameter, and hence can be recommended for selection.

We select the project with high BCR, NPV, IRR however no data for comparison in the question. Option 'B' has been marked as correct answer. Can you explain this..

NPV > 0 — the project is profitable
BCR > 1 — the project is profitable, and the higher the BCR the better
for opportunity cost you need to know comparative data of different projects potential return

so in my view project 2 and 3 are definitively profitable, however this is not enough information for discard project #4, I will opt for D
Br,
Manish P
PMP, PMI - ACP, SAFe Agilist
http://www.izenbridge.com/blog/7-effect ... ification/