When two mutually exclusive projects are considered,the NPV calculations and the IRR calculations may,under certain circumstances,give conflicting recommendations as to which project to accept.The reason for this result is that in the NPV calculation,cash inflows are assumed to be reinvested at the cost of capital,while in the IRR solution,reinvestment takes place at
A)the hurdle rate.
B)the accounting rate of return.
C)the prime rate.
D)the project's internal rate of return.

Question

Quizplus · Accepted Answer

In the IRR calculation, cash flows are assumed to be reinvested at the project's internal rate of return, which is the rate at which the project generates returns. This assumption eliminates any conflict between the NPV and IRR methods, as both methods assume that cash inflows are reinvested at the same rate of return. Therefore, the best choice is D.

When Two Mutually Exclusive Projects Are Considered,the NPV Calculations and the IRR