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Even though Option Y has the highest IRR, Option Y's NPV is not the highest among the options. The option with the highest NPV is the option that will increase shareholder wealth by the greatest amount, so Option Y is not the best recommendation.
Option Z's NPV is higher than any of the other options' NPVs. Thus, Option Z is the option that will increase shareholders' wealth by the greatest amount, so it is the project that should be recommended, even though two other options have higher IRRs. The NPV for each project is the PV of the Cash Inflows at 16% minus the initial investment. Therefore, the NPVs for the four projects are as follows: Present Value of Cash Inflows Option Investment at 16% NPV IRR X $3,950,000 $3,800,000 $(150,000) 15.5% Y 3,000,000 3,750,000 750,000 19.0% Z 2,000,000 2,825,000 825,000 17.5% W 800,000 1,100,000 300,000 18.0% Option Z has the highest NPV. Even though Option Y has a higher IRR, the amount of the investment is higher ($3,000,000 versus $2,000,000) and in addition, Option Y's NPV is lower. Option W is a small project when compared with the rest of the projects, and its NPV is correspondingly lower than the others, even though its IRR is higher. Option X is not even one to consider, because its NPV is negative and its IRR is below BGN's hurdle rate. The option that will enrich shareholders the most is Option Z, so that is the option that should be recommended.
The NPV for each project is the PV of the Cash Inflows at 16% minus the initial investment. Since the NPV for Option X is negative ($3,800,000 ? $3,950,000), Option X is not acceptable.
The option with the highest NPV is the option that will increase shareholder wealth by the greatest amount. Option W is a small project when compared with the rest of the projects, and its NPV is correspondingly low. The option that will enrich shareholders the most is the option that should be recommended.