Unconventional cash flow patterns could lead to conflicting decisions by NPV and IRR.

Question

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Unconventional cash flow patterns, such as multiple changes in direction (i.e. negative cash flows followed by positive cash flows), can lead to conflicting decisions by NPV and IRR. This is because NPV assumes cash flows are reinvested at the cost of capital, while IRR assumes cash flows are reinvested at the IRR. When cash flows change direction multiple times, the reinvestment assumption becomes unclear and can result in conflicting decisions by NPV and IRR.

Unconventional Cash Flow Patterns Could Lead to Conflicting Decisions by NPV