In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if

Question

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If the cash flows pattern is unconventional, such as non-conventional cash flows, non-normal cash flows, or mutually exclusive, then the NPV and IRR methods may disagree. If the projects have mutually exclusive cash flows, meaning that accepting one project prevents acceptance of the other, then the NPV and IRR methods will disagree about which project to accept. For such projects, the decision should be based on the NPV method. Therefore, option C is correct. If the cash flows are unconventional, such as non-normal cash flows, multiple IRRs, or an NPV that changes signs more than once, then the IRR method can give ambiguous or misleading results. In such situations, the NPV method is the better choice, as it is less affected by changes in the interest rate or cash flows patterns. Therefore, option B is also correct.

In Evaluating Capital Projects, the Decisions Using the NPV Method