Question

1. What is the difference between the two types of decisions?

2. Can we use both the NPV method and the IRR method to solve both types?

Answer 1

There are 3 types of capital budgeting decisions (1) mutually exclusive decisions in which we will have to make a selection to select one alternative among the two and both options are mutually exlusive means selection of one will lead to rejection of other.

(2) another type of capital budgeting decision is to accept or reject decision in this type of decisions more than one alternatives may be choosen.

2- Yes we can use both NPV and IRR methods to solve both types of capital budgeting decisions and both genrally offer same results. IRR comes in form of percentage while NPV in value. Some time both may give contradictory results due to difference in life of proposal and amount of recovery of cash flow.