# 1.31 Project Scale

Below we see two mutually exclusive projects, one of which requires greater investment and thus also, as it were, produces annual higher FCFs, – and NPV. The other has a smaller investment, but higher FCFs *relative* to the outlay – and a higher IRR. Put differently, the outlay for “A” is 50% higher than for “B,” the smaller project. However, the FCFs for “A” are only about 43% greater than for “B.”

We will use 10% as the discount rate for the NPV calculation. Note the conflict between the two indicated rules of thumb as below.

Year |
FCF Project A |
FCF Project B |

0 | ($3,000) | ($2,000) |

1 | 1,000 | 700 |

2 | 1,000 | 700 |

3 | 1,000 | 700 |

4 | 1,000 | 700 |

5 | 1,000 | 700 |

NPV |
$790.80 | $653.55 |

IRR |
19.86% | 22.11% |

PI |
1.26 | 1.32 |

IRR and PI say accept “B,” while NPV says accept “A.”

The IRR is a measure of return, while the NPV provides a measure of the expected dollar increase in wealth. The NPV is largely affected by scale. The IRR and PI will yield consistent results with one another; these methods are more affected by inflows relative to outflows.

What should the company do?