Question

The net present value, internal rate of return, and the profitability index methods can give different...

The net present value, internal rate of return, and the profitability index methods can give different rankings to mutually exclusive projects in certain cases. Which of the following is one of the possible reasons that causes contradictory rankings? A. Project lives of different durations B. Projects have similar costs C. Projects have a similar trend of cash flows D. Projects have different accounting rates of return

Homework Answers

Answer #1

Project lives of different durations

This is the reason that different projects can have different raking,

Explanation:

NPV and IRR sometimes give different result in terms of ranking of project, because while calculating IRR of the project it is assumes that cash flow is reinvested at IRR which is wrong, so IRR sometimes give erroneous result, while project's cash flow is reinvested at WACC.

When one have different result with different methods one should go with the result of NPV method, as it is the most reliable method among them.

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