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-conventional" 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 payback period.
C) There will be a meaningful (as opposed to irrelevant)conflict only if the projects' NPV profiles cross,and even then,only if the required rate of return is to the left of (or lower than)the discount rate at which the crossover occurs.
D) Statements a,b,and c are all true.
E) None of the above is a correct statement.

Question

Quizplus · Accepted Answer

Option A is not entirely correct as even non-conventional projects may have conflicts between NPV and IRR. Option B is incorrect as payback period is not a reliable measure for selecting projects. Option C is the most correct statement as it highlights that a meaningful conflict can occur only if the projects' NPV profiles cross and the required rate of return is lower than the discount rate at which the crossover occurs. Option D is incorrect as option A and B are not entirely true. Therefore, the best choice is C.

Assume That You Are Comparing Two Mutually Exclusive Projects