When the internal rate of return (IRR) method and the net present value (NPV) method do not yield the same recommendation for the same investment project, the project-selection decision should normally be based on:
A) IRR, because all reinvestment of funds occurs at the rate of the cost of capital and because it takes into consideration the relative size of the initial investment.
B) NPV, because it takes into consideration the relative size of the initial investment.
C) IRR, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
D) NPV, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
E) IRR, because all reinvestment of funds occurs at the rate the project generates and because it takes into consideration the relative size of the initial investment.

Question

Quizplus · Accepted Answer

NPV is considered to be the better method for project selection when IRR and NPV methods do not provide the same recommendation. This is because the NPV method takes into account the absolute value of the project's cash flows, while IRR is based on the relative size of the cash flows in relation to the initial investment. Therefore, NPV considers the time value of money more accurately and is less susceptible to fluctuations in the discount rate. Additionally, the use of NPV as the primary selection criteria can help maximize the value of the firm.

When the Internal Rate of Return (IRR) Method and the Net