Under which of the scenarios, the investment decision between mutually exclusive proposals will differ as per NPV and IRR method?

A.Size of the two project is different

B.Timing of cash-flows is different of the two projects

C.The life of the two projects is different

D.The purpose of the two projects is different

Solution

Mutually exclusive projects are those refer to a sect of projects out of which only one project can be selected for investment. • When the size of projects is different, the NPV and IRR method would give conflicting results as NPV being an absolute amount would give higher return for a higher size project while IRR being relative would give a lower % return for a larger size project • In case of difference in timing of cash inflows, the NPV and IRR give conflicting results due to reinvestment rate assumption. NPV assumes that intermediate cash inflows are reinvested at discount rate while IRR assumes that they are reinvested at the IRR rate itself. • Difference in the economic life of the projects also give contradictory results under NPV and IRR. • The purpose of the project is a subjective aspect and does not concern with NPV