No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

Question

Quizplus · Accepted Answer

This statement is true. The conflict between NPV and IRR methods arises when evaluating mutually exclusive projects with different levels of risk, and the projects' cash flows are irregular or unconventional. However, if two projects are equally risky and mutually exclusive, there will be no conflict between the two methods as long as the projects' cost of capital is higher than the rate at which their NPV profiles cross. This rate is also known as the "crossover rate," and it represents the point at which the two projects have the same NPV. If the cost of capital is higher than the crossover rate, then the NPV method will favor the project with the higher NPV, while the IRR method will prefer the project with the higher IRR.

No Conflict Will Exist Between the NPV and IRR Methods