Few questions

Submitted by danielkoshy on Mon, 12/02/2013 - 15:21

1)If we have to choose between 2 projects Project A IRR of $45,000 and payback period 15 months and Project B of IRR $30,000 and pay back period 10 months, which one would we choose?

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Stakeholder

Mon, 12/02/2013 - 18:12

My gut feeling and recollection to Rita says you need to go with the higher IRR and ignore the period of return.

andrewrmunro

Mon, 12/02/2013 - 19:20

I think you may be confusing two seperate topics. IRR is expressed as a percentage, not as a value over time.

You are confusing this with NPV which years are not considered in the evaluation as the NPV factors that in already.

Stakeholder

Mon, 12/02/2013 - 19:37

You made me look :-).

Please refer to page no. 120 and 121 (int. mgmt) of Rita PMP exam prep.  8th edition. It has given an example with two scenarios, company A and B with 21% and 15% IRRs respectively and opts for the first as it states to go with the higher IRR. It also mentions that calculating IRR is complex and requires aid of a PC ... etc.

Stakeholder

Mon, 12/02/2013 - 19:40

And yes the question does have a onfusion on IRR and NPV, NPV does mention period of return. Wonder if this is how the queston was mentione in a MOCK exam!

danielkoshy

Tue, 12/03/2013 - 04:10

Hi stakeholder, you are right, the IRR is indeed a percentage, got it mixed up with NPV. But the main concern was which factor (IRR or payback period) was more important in a decision. I believe that IRR is the deciding factor and that you can ignore the payback period. But just wanted to get feedback from other users. Thanks.