Question

The underlying cause of ranking conflicts between the NPV and IRR methods is

differing________

A) initial cost.

B) costs of capital.

C) cash flow timing.

D) profitability indices.

E) errors in calculating the discount rate.

Answer 1

Option c is correct option. Timing of cash flows.

1. IRR and NPV may conflict in certain cases of mutually exclusive projects  where NPV rule prevails.
2. IRR rate is higher than WACC generally so reinvestment as higher than WACC may not be possible always.
3. It gives multiple IRR when have more than one negative cash flows occur in the project or non conventional flows. Hence multiple IRR can create confusion
4. IRR and NPV conflict due to size and timing of cash flows.