Question

When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if:

a) the projects are independent.

b) the cash flow pattern is conventional.

c) the projects are mutually exclusive.

d) both a and b.

Answer 1

Option "D" is correct.

A conventional project cash flow in capital budgeting is one in which an initial cash outflow is followed by one or more future cash inflows.

NPV method is the preferred valuation tool as it accounts for both time value of money and the project’s risk. Furthermore, NPV is not sensitive to nonconventional projects, and therefore it is superior to the IRR technique and it gives a measure of the value increase/decrease to the firm by taking the project.