Question

We sometimes have to choose between the highest NPV and IRR; will we not always get the same decision from both of these models?

A company should accept a project if the IRR is greater than the WACC. Why will that always help maximize shareholder wealth?

Answer 1

Answer-  

No we does not get the same decisions when we use NPV and IRR.

The advantage of NPV method is that it is a direct measure of the expected increase in the value of the firm, however it does not take into consideration the size of the project.
The advantage of IRR is that it measures the profitability as a percentage which gives the return on each fdollar invested, however the disadvantage of IRR is that a project has multiple IRRsor no IRR.

If Project X has a higher IRR than Project Y, then Project X must also have a higher NPV.

For mutually exclusive projects if the NPV method and the IRR method give conflicting rankings one should use the NPV to select the project.

Answer-

The cost of capital (WACC)  is the minimum return required by shareholders.

When firms undertake projects where the IRR is equal to the WACC then the NPV is equal to zero and therefore it does not add any value to the firm.

When the IRR is greater than WACC the NPV is positive and therefore it adds value to the firm and increases or maximizes the shareholders wealth.  

If a project's NPV is less than zero, then its IRR must be less than the WACC.

Therefore a company should accept the project if IRR is greater than WACC.