Ranking conﬂicts can arise if one relies on IRR instead of NPV when:
A) The ﬁrst cash ﬂow is negative and the remaining cash ﬂows are positive.
B) Projects are independent of one another.
C) A project has more than one NPV.
D) Projects are mutually exclusive.
E) The proﬁtability index is greater than one.

Question

Quizplus · Accepted Answer

When projects are mutually exclusive (meaning only one can be chosen and the others rejected), ranking conflicts can arise if one relies on IRR instead of NPV. This is because IRR assumes that positive cash flows are reinvested at the same rate as the IRR, which may not always be realistic in practice. NPV, on the other hand, takes into account the time value of money and assumes cash flows are reinvested at the cost of capital. Therefore, in the case of mutually exclusive projects, it is best to use NPV to accurately evaluate which project will provide the highest return.

Ranking Conﬂicts Can Arise If One Relies on IRR Instead