Two mutually exclusive projects have conventional cash flows, but one project has a larger NPV while the other project has a higher IRR. Which of the following is least likely responsible for this conflict? A. Reinvestment rate assumption. B. Timing of the projects’ cash flows. C. Size of the projects’ initial investments. D. Risk of the projects as reflected in the required rate of return.
D. size, timing and assumption are why they are different
D. required rate of return isn’t used to to calculate IRR.
good looks keanhu!
I think it’s B. There’s an example of this in Schweser. Projects that have most of its cash flows come in early will have higher NPVs but lower IRR’s compared to a project that has higher cash flows coming in at the latter stage. Reason being, higher cash flows coming in early are worth more than higher cash flows coming in later -> higher NPV
D. Risk of the projects as reflected in the required rate of return. NPV/IRR do not capture risk assumptions.
Bollocks, question says which of the following is LEAST likely PAY ATTENTION!!
Pretty sure it’s D. I would think reinvestment rate assumption is linked to the timing and size of cash flows. Plus, as it has already been mentioned, IRR is independent of the required rate of return.
IRR Being independent of Required return would be cause for a difference don’t you think
D for me. Also, it depends on how we characterize risk.
Answer is D. Required RR not used in IRR, is a good way to remember.