For projects with typical cash flows the IRR method agrees with the NPV accept/reject decision.

Question

Quizplus · Accepted Answer

When the cash flows of a project are typical or conventional, both the IRR and NPV methods give the same accept/reject decision. This is because the IRR method calculates the discount rate at which the present value of the project's cash inflows equals the initial investment, while the NPV method calculates the present value of the project's cash inflows minus the initial investment. Therefore, if the IRR is higher than the required rate of return, the NPV will be positive and the project should be accepted, and vice versa. However, when the cash flows are non-conventional (i.e. involve multiple sign changes), there can be multiple IRR values or no IRR value, which can lead to conflicting decisions with the NPV method.

For Projects with Typical Cash Flows the IRR Method Agrees