Choose NPV, IRR, BCR or Payback period ??

There are multiple projects your organization is considering for the upcoming fiscal year. Project A has an NPV of $85,000. Project B is a $1 million project and has the benefit cost ratio of 1.6. Project C has an internal rate of return (IRR) of 15%. Project D has a payback period of two years. Based on this information which is the best project to select for execution?

a. Project B

b. Project C

c. Project D

d. Project A

 

What is the righ answer ???? and why ???

Project C.  IRR is more precise than NPV, and NPV is more precise than payback period.

Dear Kevin

 

Thanks a lot, but I am confused, IRR is just a percent so it my by 15% of 1 million $ or 15% of 100$ so i cant know but the NPV is the amount of money i will receive today !! so why IRR which is not accurate is better than NPV ???

Nagy Saad


 answer ahoild ne project a, as npv has the priority

Yes it should be A NPV.

 any blog or documents which explains this in detail...I mean any thumb rule to select a project.

All 4 things , NPV, IRR, BCR and PAYBACK, could not be compared from each other. I don't think this is a PMI qualified question.

Since out of 4, one has to be selected, so pick only NPV value, because mostly NPV is the measure of project selection.

If we analyse, all options to each other,

Payback option - does not showing any profit, and hence not be a right answer.

IRR  option - showing IRR value, 15%, - it is also an incomplete information. what is discount rate? - not shown. Suppose Discount rate is also 15% then , NPV will be 0.

BCR option - here outflow 1million and inflow is 1.6 million means, profit is 600000 , it is not a NPV , its NPV will be definitely lower than profit value 600000. (Because discount rate if considered 15% -- NPV, for one year becomes as = 1600000/1.15 = 1391301.), but number of years are not given.

Now in option D - project A - with NPV = 85000, exclusively coming out  with a value, and covers IRR, Discount Rate and Payback.

But BCR cant be justified. (Suppose inflow is 3million with NPV 85000, does not mean , BCR will be higher than 1.6.)

So category of question is low, and I believe exam will not ask such vague question.

Adela's picture

such an interesting question but I don't think this kind of question will be in the real PMI exam. The real one only compare each other with the same type of method such as NPV vs NPV or IRR vs IRR. 

The Correct Anaswer to this Question is Option A) Project B

Option B is incorrect: Not enough information, (Project no project cost given so we don't know 15% of what., An IRR return of 15% on a $1,000 project would be $150.

Option C is incorrect. Not enough info. Again payback on what,

Option D is incorrect - Not enough info - A +ve NPV is good but again we don't know the amount invested to generate $85k - It could be $1Billion,

Option A) Correct Project B - we know we have a enough info to confirm $600,000 excess of discounted benefits over discounted costs. The embedded discounting is important here as we don't need to know the duration of the project and don't need to discount the $600k.