Question

Question 2 (1 point) 1. Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV. 5 True False Question 3 (1 point) If a project's NPV is negative, then its payback must be longer that its economic life True False

Answer 1

When there is aconflict between the two capital budgeting methods, you should always select NPV above the IRR method to resolve the conflict. As the IRR assumes the returns are invested at the IRR rate whereas NPV assumes the returns to be reinvested at WACC. Also, there can be multiple IRR. Hence,

1. True

NPV discounts the cash flows by WACC. However, the cash flows are not discounted when payback period is calculated. Hence, even when the NPV is negative the payback period may or may not be longer than its economic life.

2. False

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