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QUESTION 7 In general, where there is a conflict between two mutually exclusive projects, the NPV of a project and its internal rate of return, in terms of making a go/no go decision, the conflict is resolved by which of the following rules? a
QUESTION 7 In general, where there is a conflict between two mutually exclusive projects, the NPV of a project and its internal rate of return, in terms of making a go/no go decision, the conflict is resolved by which of the following rules? a. Where the NPV method chooses one project but the IRR method chooses the other, the conflict should generally be resolved in favour of the project with the higher NPV. b. Where the NPV method chooses one project but the IRR method chooses the other, the conflict should generally be resolved in favour of the project with the higher accounting net income. c. Where the NPV method chooses one project but the IRR method chooses the other, the conflict should generally be resolved in favour of the project with the higher IRR. d. Where the NPV method chooses one project but the IRR method chooses the other, the conflict should generally be resolved in favour of the project with the lower NPV.
Expert Solution
When there are two different answers given by NPV and IRR method about selecting a project, we have to make a choice between the two. The IRR method has a lot of drawbacks including the one with multiple IRRs. When the two methods have different answers, the project with a higher NPV is to be selected. Hence, the correct answer is-
a. Where the NPV methods choose one project but the IRR method chooses the other, the conflict should generally be resolved in favor of the project with the higher NPV.
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