IRR Question

http://preparepm.com/pmp/integration.html has the following question which I want to confirm:


Alice Newland is a Project Manager for XYZ consultants. She has been asked to help choose one of the four potential project candidates. The management used internal rate of return technique for project selection. Which of the following projects should Alice recommend to the management.



  1. Project A requires making an initial investment of $100,000 and will give monthly return of $5,000.

  2. Project B requires making an initial investment of $200,000 and will give monthly return of $8,000.

  3. Project C requires making an initial investment of $100,000 and will give annual return of $40,000.

  4. Project D requires making an initial investment of $200,000 and will give annual return of $60,000.

IRR should be the highest value and my answer was b but the answer is a. Can someone explain why?


Thanks,


f

You have to focus on how soon you can recover your investment.


A: 100,000/5,000 = 20 months


B. 200,000/8,000 = 25 months


C. 100,000/40,000 = 2.5 years = 30 months


D. 200,000/60,000 =3.3 years =40 months


Answer is A.


 


Chandra

 Hi,

I now it's an old post, but I am preparing a mock test for one of my client and came across this question.

The point is that the text of the question said you are using the IRR, so your focus should be on the rate and not on the time period in wich you will recover the investment, this will be the case when using the payback period and not the IRR.

So i don't get why A is the correct answer .... anyone can help?!

Thanks

V.

Correct answer should be B

bcoz company is getting $8000*12 = $96000 yearly which is higher than the other options.

 

The options of A and B are in monthly rates and once you convert the same into annual returns and divide it by the project investment cost,it will show option A is the viable option.


IRR should always be looked as a barometer to measure project % wise like your fixed deposit.Higher the returns the better it is.For option A it is 60% as compared to the other three options.


 

I think it all depends. The higher the investment will be the higher the profit will be as your options of projects are showing but the risk of loss are also very high in case of high investment. I would suggest the company website https://topaussiewriters.com/smartwritingservice-com-review/ link should start with lower investment and after getting the success that can invest more.

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