Project Feasibility Study

Correct Answer: The project's alignment with strategic objectives

The best answer in this scenario is 'The project's alignment with strategic objectives'. Here's why: 1. Both projects have similar Net Present Values (NPV), which means they are roughly equivalent in terms of financial value over time. 2. Project A has a higher Internal Rate of Return (IRR), which typically indicates better profitability. 3. Project B has a shorter payback period, which means it recovers its initial investment faster. 4. With these conflicting indicators, the most important factor to consider is how well each project aligns with the organization's strategic objectives. Strategic alignment is crucial because it ensures that the chosen project contributes to the company's long-term goals and overall mission. This factor goes beyond simple financial metrics and considers the broader impact of the project on the organization's future. The other options focus solely on financial metrics, which, while important, do not provide a complete picture when evaluating projects with similar NPVs and conflicting IRR and payback period indicators. Strategic alignment offers a more comprehensive approach to project selection in this case. Choosing based on IRR alone might lead to selecting a project that's more profitable but less aligned with company goals. Selecting based on payback period might prioritize short-term gains over long-term strategic benefits. And focusing on initial capital investment doesn't consider the project's overall value or strategic importance. Therefore, in this scenario, strategic alignment should be given the most weight to ensure the selected project best serves the organization's overall objectives.

Correct Answer: The project's return is less than the cost of capital, indicating it may not be financially worthwhile.

The proposition with the Internal Rate of Return (IRR) is less than expected suggests that the project's return is less than the cost of capital. Essentially it means that the project would not generate enough returns to cover the investment cost, indicating it may not be financially worthwhile. Therefore, based on the concept of IRR, the best interpretation is 'The project's return is less than the cost of capital, indicating it may not be financially worthwhile.'The other answers can be discarded due to the following reasons:'The project will provide a high financial return and should be pursued.' is incorrect because a lower IRR suggests the opposite, i.e., the project's return would not be high'IRR isn't relevant to the project's success.' is not true because IRR is a critical financial metric to determine a project's profitability'The lower than expected IRR indicates substantial project risk.' is misleading. While a lower IRR may reflect less profitability, it doesn't directly indicate project risk.

Correct Answer: The project isn't economically viable and it's best to reconsider.

The Net Present Value (NPV) principle used in financial decision-making takes into account both the initial costs of a project and the economic benefits it provides over a period of time, all discounted to the present value. If the Present Value (PV) of benefits is lower than the PV of the initial costs, it means the investment will not yield a return that surpasses its initial outlay. Therefore, based on the NPV principle, the project is not economically viable, and it's best to reconsider. The suggestion to proceed with the project despite PV of benefits being lower than costs, ignore only the costs, or advise stakeholders to disregard the NPV principle, even though it provides an economic benefit, is a flawed approach from a financial viewpoint and contradicts the principles of sound economic decision-making. It could potentially lead to financial losses, since costs outweigh benefits when discounted to their present value. Therefore, these alternatives are not correct.