Question

Hi, what´s the better measure when the capital is scarce: NPV or IRR?

Answer 1

NPV is in general a better measure. But here it is most emphatically better because it will tell you precisely how much cash the project will throw off.

For example, suppose a company has $1,000 capital and the choice of only two non-replicable projects:
A, investment $100K, IRR = 50%, NPR = $1 million
B, investment $1,000, IRR = 10%, NPV = $1.2 million

Even though project A has a higher IRR, project B is preferable because it will give you more cash.

Answer 2

Thanks. Moreover, if you use the MIRR you will have the same answer given by the NPV, i.e, the project B.