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NPV IRR conflict

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(a) When can the NPV and the IRR methods of evaluating investment projects provide contradictory results?
(b) How can this arise?
(c) Which method should then be used? Why?

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(a) When can the NPV and the IRR methods of evaluating investment projects provide contradictory results?
Both NPV and IRR are investment appraisal methods and at times these methods can provide contradictory results. When there are mixed positive and negative cash flows occurring in the project, IRR method may provide multiple IRRs and may conflict with the NPV method. Even when there is a higher initial investment, both methods may contradict as NPV will measure the benefits in absolute terms and IRR will look into the return earned on the initial investment. Also, when multiple projects have different life spans, contradiction may occur as to the selection of projects. Thus, based on the nature and type of cash flows, NPV and IRR methods may ...

Solution Summary

When can the NPV and the IRR methods of evaluating investment projects provide contradictory results is determined. The method which should then be used is provided.

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