On a purely theoretical basis, IRR is a better approach when selecting among two mutually exclusive projects.

Question

Quizplus · Accepted Answer

IRR (Internal Rate of Return) does not always account for the scale of the project, the timing of cash flows, or the reinvestment rate of the cash flows, which can lead to misleading comparisons between mutually exclusive projects. NPV (Net Present Value) is generally considered a better approach because it measures the absolute value added to the firm and accounts for the scale of investment and the cost of capital.

On a Purely Theoretical Basis, IRR Is a Better Approach