Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?

Question

Quizplus · Accepted Answer

The NPV method assumes a reinvestment rate equal to the discount rate, while the IRR method assumes a reinvestment rate equal to the internal rate of return. This can result in different rankings of mutually exclusive investment projects since the NPV method assumes the cash flows will be reinvested at a lower rate than the IRR method. As a result, a project with a lower IRR but higher NPV may be preferred under the NPV method, while a project with a higher IRR but lower NPV may be preferred under the IRR method.

Why Do the NPV Method and the IRR Method Sometimes