Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first.In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

Question

Quizplus · Accepted Answer

This statement is false. Conflicts between NPV and IRR rankings cannot be resolved by simply choosing the project with a higher IRR. The NPV method is generally considered to be more reliable in ranking projects because it takes into account the time value of money and assumes that cash flows will be reinvested at the firm's cost of capital. In contrast, the IRR method assumes that cash flows will be reinvested at the project's own internal rate of return, which may not reflect the cost of capital. Therefore, in cases of conflict, the NPV method should be given more weight than the IRR method.

Conflicts Between Two Mutually Exclusive Projects Occasionally Occur, Where the NPV