In preference decisions,the profitability index and internal rate of return methods may produce conflicting rankings of projects.

Question

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The profitability index and internal rate of return methods may produce conflicting rankings of projects because they use different criteria to evaluate the projects. The profitability index ranks projects based on the ratio of the present value of future cash flows to the initial investment, while the internal rate of return ranks projects based on the rate at which the project's net present value equals zero. Therefore, projects with different cash flow profiles may be ranked differently by these two methods.

In Preference Decisions,the Profitability Index and Internal Rate of Return