In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if
A) the projects are independent.
B) the cash flows pattern is unconventional.
C) the projects are mutually exclusive.
D) Both b and c are correct.

Question

Quizplus · Accepted Answer

If the cash flow pattern is unconventional, the discount rate used in the NPV method may not accurately capture the project's risk, while the IRR method assumes reinvestment of cash flows at the project's internal rate of return, which may not be realistic if the cash flow pattern is unconventional. If projects are mutually exclusive, the choice between the projects using the NPV method depends on the size of the investment, while the IRR method assumes that the projects can be scaled up or down to fit the available investment. Therefore, both b and c are correct, and the answer is D.

In Evaluating Capital Projects, the Decisions Using the NPV Method