31. Which of the following reasons is responsible for the conflict in rankings of mutually exclusive investment projects?
Answer: E) All of A, B, and C
- A) Difference in costs of projects
- B) Difference in the timing of cash flows
- C) Difference in useful lives of projects
- D) Both A and C
- E) All of A, B, and C
Explanation
E) All of A, B and C. NPV and IRR can rank two mutually exclusive projects differently when the projects differ in size or initial cost, in when their cash flows arrive, or in how long they run. NPV assumes cash flows are reinvested at the cost of capital, IRR at the IRR itself, and each of these differences widens that gap. When the rankings clash, NPV is usually followed.
Asked in: TGTDCL 2021
Topic: Arithmetic