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In a board meeting, the company is considering making an investment. Two projects are being considered - Project A and Project B. The following conversation
In a board meeting, the company is considering making an investment. Two projects are being considered - Project A and Project B. The following conversation takes place. Mr. A: I think this decision is a no-brainer. Project A has a higher IRR, so we should definitely go with Project A. Ms. B: What are the NPVs for Projects A and B? Have we computed them? Mr. A: There is no need to calculate NPV here. The decision is clear - go with Project A because its IRR is higher compared to that of Project B. It's just common sense. IRR is the rate of return, should we not want a higher rate of return? NPV gives a dollar sum. That's difficult to make sense of. IRR is in percentage form, it's easier to understand and explain to our shareholders. Why are you not getting this? Ms. B: Ok. But I just get a feeling that we're missing something here. I'm not convinced. Mr. A: There's nothing to discuss. The right to do is very clear. In addition, may I also add that the payback period for Project A is also shorter than that of Project B, so it is less risky. Higher return, less risk, what else is there to talk about?! You are the CEO of this company. Based on your knowledge of capital budgeting, comment on this conversation thread. [10 marks]
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