When two mutually exclusive projects have conflicting rankings under NPV and IRR, which criterion is generally preferred for maximising shareholder wealth?
Correct answer: C. Net present value
- A. Accounting rate of return
- B. Payback period
- C. Net present value
- D. Average inventory period
Explanation
Net present value measures the amount by which a project is expected to increase wealth in present-value terms. IRR can rank mutually exclusive projects differently because it is a percentage measure and may not reflect differences in project scale.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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