When might the IRR rule provide different guidance regarding project selection than the NPV rule?
a) When a project has net expenditures (costs) that occur after positive cash inflows.
b) When a project has two or more years of initial net expenditures, followed only by cash inflows.
c) When a project has multiple IRRs.
d) When deciding between
mutually exclusive projects with different initial investment
amounts.
Homework Answers
Multiple IRRs have both positive and negative IRRs for single project which makes a difficult to select the project based on IRR rule as the cost of capital will be higher than the negative IRR and lower than the positive IRR.
The NPV and IRR for mutually exclusive projects with different initial investments may not agree on one particular decision due to the annual returns.
Hence, Option B i.e. c and d are correct.
Add Answer to:
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a) Neither
b) Project A
c) Project B
d) Both Projects A or B
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If the projects were independent, which project(s) would be
accepted according to the IRR method?
a) Neither
b) Project A
c) Project B
d) Both Projects A or B
If the projects were mutually exclusive, which project(s) would
be accepted according to the IRR method?
a) Neither
b) Project A
c) Project B
d) Both Projects A or B
The reason is
a) TheNPV and IRR approaches use the same reinvestment rate
assumption and so both approaches reach the same...
The reason is the NPV and IRR approaches use different reinvestment rate assumptions so there can be a conflict in project acceptance when mutually exclusive projects are considered. v approach should be used for the Reinvestment at the WACC is the superior assumption, so when mutually exclusive projects are evaluated the NPV capital budgeting decision.
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