A project manager is evaluating two potential projects to recommend to the steering committee. Project A has an Internal Rate of Return (IRR) of 12% and a Payback Period of 3 years. Project B has an IRR of 18% and a Payback Period of 4 years. The organization's strategy is currently focused on maximizing long-term profitability over liquidity. Which project should be recommended?

Answer options:

Project A, because it recovers the investment faster.

Project B, because it has a higher Internal Rate of Return.

Neither, as both payback periods exceed 2 years.

Project A, because lower IRR implies lower risk.

How to approach this question

Align the metric to the strategy. Profitability = IRR/ROI/NPV. Liquidity/Speed = Payback Period.

Full Answer

B.Project B, because it has a higher Internal Rate of Return.✓ Correct

IRR measures the profitability of an investment. Since the strategy prioritizes 'maximizing long-term profitability', Project B (18%) is superior to Project A (12%). Payback period measures how quickly cash is recovered (liquidity), which is secondary in this specific strategic context.

Common mistakes

Choosing the shorter payback period (A) by default, ignoring the specific strategic goal mentioned.

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