Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments:

Cash Flows ($ Thousands)

Project C0 C1 C2 IRR (%)

A -400 +250 +300 23

B -200 +140 +179 36

The opportunity cost of capital is 9 %. Mr. Clops is tempted to take B, which has a higher IRR.

(a) Explain to Mr. Clops why this is not the correct procedure.

(b) Show him how to adapt the IRR rule to choose the best project.

(c) Show him that this project also has the higher NPV.