In projects where cash flows are negative at both the beginning and the end of the project life, the results of the NPV and IRR are often ____.

Question

Quizplus · Accepted Answer

When cash flows are negative both at the beginning and end of a project's life, the NPV and IRR can give contradictory results. This is because NPV assumes a reinvestment rate for future cash inflows, while IRR assumes reinvestment at the IRR. If the cash flows are negative at the beginning and end, the NPV assumes that the funds received from the project will be reinvested at a rate that is lower than the IRR. As a result, NPV may lead to rejecting the project while IRR may indicate accepting it. Therefore, the results of NPV and IRR can be contradictory in such situations.

In Projects Where Cash Flows Are Negative at Both the Beginning