Question

IRR and NPV conflict Under what circumstances might the IRR and NPV approaches have conflicting results?

IRR and NPV conflict Under what circumstances might the IRR and NPV approaches have conflicting results?

Homework Answers

Answer #1

Yes, IRR and NPV do conflict.

IRR and NPV conflict when the projects are mutually exclusive and the scales of two projects are different.

Suppose, Investment A has initial investment of $1,000 and is expected to produce $2,000 in one year, then its IRR is 100%.

At a 10% discount rate, its NPV = -1,000 + 2,000/(1 + 0.10) = $818.1818181818

Invsetment B has an initial investment of $100,000 and is expected to produce $120,000 in one year, then its IRR is 20% (Lower than Investment A)

At a 10% discount, its NPV = -100,000 + 120,000/(1 + 0.10) = $9,090.9090909091 (Much higher than Investment A)

IRR rule suggests that we accept Investment A, but NPV rule suggests that we accept Investment B. That's the conflict!

But, we should always go with NPV rule when both conflict each other.

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