IRR VS NPV

Submitted by Ahmad1111 on Sun, 01/27/2013 - 01:04

 Just started checking out some pmp question, clicked the first link in the free pmp exam list, and I got baffled by this one:

 

Based on the information provided below, which project would you recommend for being pursued?

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

 

I went with D because IRR lacks the initial investment amount, so I can't compare it to the NPV value in project 2. But the correct answer is B. How is this possible? NPV of project 3 can be higher than $500k or lower.. or even negative if cost of capital is above 15%. How can we say that project 3 is the best?

Thanks guys.

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sspawar

Sun, 01/27/2013 - 06:21

 search old posts

http://www.pmzilla.com/need-your-inputs-0

Ahmad1111

Mon, 01/28/2013 - 02:05

 Thanks for the link man. Unfortunately didn't come out with anything. People argued or both B and D.

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admin

Mon, 01/28/2013 - 03:55

The entire discussion is in that thread and the rationale for correct answer is given by Rita. Its her question bank and some of the ambiguity maybe by design.  Answer is B as othere options cannot be considered due to insufficient data

 

Ahmad1111

Mon, 01/28/2013 - 06:14

Why is B the answer since, as you said, there is insufficient data? Shouldn't D be the answer? D is pretty much saying that.. insufficient data.

To clarify my issue, let me rephrase the question: Why would you recommend project 3 when project 2 has the potential to be better?

sspawar

Mon, 01/28/2013 - 11:08

Dont give importance to such questions.