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Explain which of the two projects is the optimal investment

A company has been offered the following mutually exclusive investment projects:

Project 1 Project 2

Initial investment £400,000 £80,000

Payback 6 years 3 years

Internal rate of return 9% 13%

Net present value £63,000 £10,500

(i) Explain why the three investment criteria payback, internal rate of return (IRR) and net present value (NPV) might have given different rankings for the two projects.

(ii) Explain which of the two projects is the optimal investment project for the company, based on the information given.

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