NPV and IRR conflict

CFA Level I
#1

Out of two mutually exclusive projects -one has higher NPV while other hs higher IRR. Which one of the following is least likely to be the reason for the conflict? 1. Reinvestment assumption 2. Timing of projected cash flows 3. Size of initial investment 4. Risk of projects as reflected in required rate of return. Thanks

#2

4?

#3

3

#4

I’d go with (1) 2 & 3 clearly are reasons for the conflict… leaving 1 & 4… when the cost of capital is less then the crossover rate (as in this case) the NPV and IRR methods give conflicting rankings. the “required rate of return” is the cost of capital, so i believe (4) is out as well. so by process of elimination I’d choose (1)

#5

I would think Reinvestment rate is also a reason for the conflict. In the IRR method - you are assuming that all the cash flows are reinvested at the IRR, which is an unreasonable assumption. In the NPV method, things are being reinvested at the WACC (cost of capital), so that is more reasonable. This assumption would cause a conflict between NPV and IRR methods of project evaluation. CP

#6

I think it is 4? IRR doesn’t have to do with the required rate for the project. Don’t we just compare with the hurdle rate.

#7

saurya_s Wrote: ------------------------------------------------------- > I think it is 4? IRR doesn’t have to do with the > required rate for the project. Don’t we just > compare with the hurdle rate. you posted the question… no answer key?

#8

i’d say 4. what is the answer for this?

#9

it is 4 – it is asking for LEAST LIKELY