Project Evaluation: Ranking Conflicts Between NPV and IRR

A firm is trying to choose between two mutually exclusive projects, Project A and Project B. If the internal rate of return (IRR) on Project B exceeds the IRR on Project A, then:

Not exactly. Despite its higher IRR, a project may be less desirable than an alternative. So it is necessary to consider other factors as well.

Not quite. You cannot determine this simply by knowing that one of them has a higher IRR.

Correct! Since the most desirable project will always have the highest NPV, comparing the projects' NPVs at a given cost of capital will identify the preferred alternative.

the firm should always choose Project B.

the NPV of A exceeds that of B at any discount rate.

at the firm's cost of capital, the most desirable project will have the higher NPV.