The NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is greater than the crossover rate.

Question

Quizplus · Accepted Answer

The NPV and IRR methods can lead to different accept/reject decisions for mutually exclusive projects due to differences in the projects' cash flow timing and scale. However, the statement about the cost of capital and crossover rate is incorrect. The crossover rate is the cost of capital at which the NPVs of the two projects are equal. If the actual cost of capital is different from the crossover rate, it doesn't inherently mean the methods will lead to different decisions; it depends on the projects' specific NPV profiles relative to the actual cost of capital.

The NPV and IRR Methods,when Used to Evaluate Two Equally