Project Selection methods Question
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 as 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
a)I do understand that NPV is the best choice. But my only question is why is Benefit Cot Ratio not good. For ex ample if the BCR is 1.6 then it means that for a 1 million project (which I assume is the cost) the Benefit would be (1.6 * 1 million) = $1,600,000 which implies a profit of 600,000. This profit is greater than the NPV of 85000$.
b) To continue, what would be the missing information, if added, in this example make BCR a better alternative than NPV?
c) Finally, if there are different project selection methods like NVP, Payback, IRR, BCR, etc. is there a blind order to select an answer choice or is there some preferable order?
Thanks,
admin
Fri, 09/24/2010 - 08:19
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D is out of question since
D is out of question since there is no $ value mentioned.
C only says IRR is 15%, but does not give any value
Between A and B - B seems to be more profitable
mukeshprasad.a
Sat, 10/02/2010 - 13:25
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Project C would be the Answer if
Project C would be the Answer if the value of the project was not mentioned along with BCR.
Assuming the value not present of 1 milllion,
15 percent IRR is a more quantified benefit than a BCR of 1.6. You would need more information to understand what the BCR of 1.6 will mean on the project. Thus, it is impossible to determine whether the BCR of 1.6 is better than an IRR of 15 percent.
There is not enough information provided to support recommending or not recommending other projects. This leaves only choice C, with a 15 percent return, as providing a clear benefit.
But with the 1million value made available the BCR takes the cake here.
Answer:Project B(Choice A)
All the best,
Mukesh
gadewars
Fri, 07/27/2012 - 17:04
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I might be replying late, but
I might be replying late, but point to the matter above is when BCR will be received. Imagine the 1 million project goes on for 100 years the BCR would have no value at that time hence BCR does Choice A (Project B) not a good option
moeabdelaziz
Sat, 07/28/2012 - 00:34
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Right Answer
Please what would be the final answer out of the confusion as i belive i had one question like this in the exam at my first attempt and i would like to know the right answer and how to take of the confusion.