Why may the IRR criterion lead to an incorrect decision when applied to mutually exclusive projects?
A) The NPVs of mutually exclusive projects cross over at some discount rate.
B) Cash flows cannot be discounted when considering mutually exclusive projects.
C) Mutually exclusive projects produce negative IRR values.
D)Mutually exclusive projects have multiple IRRs.

Question

Quizplus · Accepted Answer

The IRR criterion may lead to incorrect decisions for mutually exclusive projects because their NPVs can cross over at different discount rates, meaning the project with the higher IRR at one discount rate may not have the higher NPV at another, leading to potentially incorrect project selection.

Why May the IRR Criterion Lead to an Incorrect Decision