In comparing the techniques of net present value and internal rate of return:
I. The NPV and IRR techniques will generate the same accept-reject decision provided the projects have conventional cash flows.
II. The differences between the underlying assumptions of NPV and IRR can cause them to rank projects differently.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements I and II are correct.
D) Neither statement I nor II is correct.

Question

In comparing the techniques of net present value and internal rate of return: 
I. The NPV and IRR techniques will generate the same accept-reject decision provided the projects have conventional cash flows.
II. The differences between the underlying assumptions of NPV and IRR can cause them to rank projects differently.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements I and II are correct.
D) Neither statement I nor II is correct.

Quizplus · Accepted Answer

Statement I is correct because if the projects have conventional cash flows (negative cash flows in the initial period followed by positive cash flows in the subsequent period), the NPV and IRR techniques will generate the same accept-reject decision.

Statement II is also correct because NPV assumes reinvestment of cash flows at the cost of capital, while IRR assumes that cash flows are reinvested at the project's internal rate of return. This difference in assumptions can cause the two techniques to rank projects differently. If the cost of capital is higher than the IRR, the NPV will rank a project lower than the IRR would. On the other hand, if the IRR is higher than the cost of capital, the NPV will rank a project higher than the IRR would.

In Comparing the Techniques of Net Present Value and Internal