A ranking conflict that occurs when evaluating two mutually exclusive projects using the NPV technique and the IRR technique can be resolved by _____.

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Quizplus · Accepted Answer

When evaluating two mutually exclusive projects using the NPV and IRR techniques, a ranking conflict may occur where one technique may rank one project higher than the other, while the other technique may rank the opposite. In this case, the best way to resolve the conflict is by using the modified internal rate of return (MIRR) method. MIRR overcomes the limitations of the IRR method by assuming that any cash inflows from a project are reinvested at a rate equal to the company's cost of capital. This provides a more realistic measure of a project's profitability, thus resolving the ranking conflict. The profitability index (PI) method may give different rankings for projects, but it does not necessarily resolve the conflict as it still relies on one technique's assumptions. The other methods, such as the IRR, discounted payback period, and traditional payback period, do not address the conflict between the two techniques and do not provide a resolution.

A Ranking Conflict That Occurs When Evaluating Two Mutually Exclusive