Question

1.      IRR’s and NPV’s will always identify the same financial decision EXCEPT when:

                                                           i.     Choosing between mutually exclusive projects

                                                          ii.     Payback periods are shorter than 1 year

                                                        iii.     Required rates of return are negative

                                                        iv.     Cash flows reverse in and out of the project multiple times

a.     (i) and (ii) only

b.     (iii) and (iv) only

c.     (i) and (iv) only

d.     (i), (ii), and (iv) only

Please fully explain the reason for your answer. Thank you

Answer 1

Ang is In case of mutually Exclusive project the A IRR often give contradicting hest Result becase because of amount of capital outlay in the project evaluation may be because of the cash flow timinga pattern which will tho may increase our decrease IRR because IRR is the Rate at which & NPU become zero. While NPU is present value of future cash flow discounted by Retwan Required Return from the poroject. Il Pay back period are shorter than 1 year a) IRR will give the better Result than NPV because the fou descounting the future Cash flow is not easy here discounting factoor in more influence and by shoort term inflation while incore of long thertor discounting inflation yearly inflation is not afeffer get infta influence by sudden market change because of time factors. Required hale of Return are regative -) If the required Rute of Return is negative than bath NPV4 IRR will show the some Result ie we should not invest in project because the Return from the project is negative (ili (IV) Cash flow's reverse in dout of the project mo multiple time both IRR & NPU will show different Result because when the timm timing of cash 4 pattern of cash flow changes IRR will become negative our it will show multiple IRR but NPU will Remo Show's the net present value only lie final Ney will Remain some.) so & Answer is option (d)