Assume that you are comparing two mutually exclusive projects. Which of the following statements is most correct?
A) The NPV and IRR rules will always lead to the same decision unless one or both of the projects are "non-normal" in the sense of having only one change of sign in the cash flow stream, i.e., one or more initial cash outflows (the investment) followed by a series of cash inflows.
B) If a conflict exists between the NPV and the IRR, the conflict can always be eliminated by dropping the IRR and replacing it with the MIRR.
C) There will be a meaningful (as opposed to irrelevant) conflict only if the projects' NPV profiles cross, and even then, only if the cost of capital is to the left of (or lower than) the discount rate at which the crossover occurs.
D) Statements a, b, and c are true.

Question

Quizplus · Accepted Answer

Option A is incorrect because even non-normal projects may have conflicting results with NPV and IRR. Option B is incorrect because dropping IRR for MIRR does not necessarily eliminate the conflict. Option C is correct because a meaningful conflict only occurs when projects' NPV profiles cross, and even then, only if the cost of capital is lower than the discount rate at which the crossover occurs. Option D is incorrect because only option C is true.

Assume That You Are Comparing Two Mutually Exclusive Projects