Consider the following projects and information about each
Project Initial investment ($millions) NPV($millions) IRR(%)
C 40 16 13
D 46 12 10
E 12 4 18
F 24 8 16
G 90 24 12
Assume that this firm has a cost of capital of 9% for these projects and has a capital budgeting limit of $120 million. Projects are independent.
(a) If you use the IRR criterion, how should you choose between these projects and which projects should you accept?
(b) If you use the NPV criterion, how should you choose between projects and which projects should you accept?
(c) Explain why you end up selecting different combination of projects. Which decision tool should you use to make the decision? Why?