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Author Question: You are considering two mutually exclusive and equally risky projects. Both have IRRs that exceed ... (Read 151 times)

danitzaidaly

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on: Aug 7, 2023
You are considering two mutually exclusive and equally risky projects. Both have IRRs that exceed the WACC that is used to evaluate them. Which of the following statements is correct? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

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If the two projects’ NPV profiles do not cross in the upper right quadrant, then there will be a sharp conflict as to which one should be selected.


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For a conflict to exist between NPV and IRR, one project must have a decreasing stream of cash flows over time while the other has an increasing stream. If both sets of cash flows are increasing or decreasing, there must be no conflicts, even if one project is smaller than the other. 


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For a conflict to exist between NPV and IRR, the initial investment cost of one project must be less than the cost of the other.


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If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria.

Financial Management: Theory and Practice ¦ Brigham, Ehrhardt, Gessaroli, Nason ¦ 4th Edition
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Marked as best answer by danitzaidaly on Aug 7, 2023

nikspatel037

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Reply #1 on: Aug 7, 2023
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danitzaidaly

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Reply 2 on: Aug 7, 2023
Great answer, keep it coming :)

aruss1303

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Reply 3 on: Yesterday
Gracias!

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