NPV - IRR

IN comparing the IRR and NPV methods to make decisions on mutually exclusive projects, which of the following is least accurate? a) the IRR method can result in multiple values b) the NVP rankings depend on the cost of capital c) the IRR method has more appropriate reinvestment rate assumption d) the IRR method contains valuable information about a projects “safety margin” by comparing the IRR to cost of capital Please explain

I would say C b/c IRR assumes reinvestment @ IRR and that isn’t always (almost never from what I gather) possible.

Agree with C.

I agree with C as well Irr is a constant rate it couldn’t be appropriate to show any kind of reinvestment rates ) the IRR method can result in multiple values a project can have multiple irr b) the NVP rankings depend on the cost of capital the ranking depend on the discount rate c) the IRR method has more appropriate reinvestment rate assumption doesn’t make sense since it’s a unique rate d) the IRR method contains valuable information about a projects “safety margin” by comparing the IRR to cost of capital comparing Irr to cost of capital you can tell determine that margin

i would say C too.

yes c) is the correct answer. I assume the point is that the interim cash flows cannot be reinvested at the IRR but rather at the cost of capital.

The concept of IRR is same as YTM, it assumes that every subsequent cash flow would be reinvested at that rate. This is one of the biggest downside of these 2.

Answew is C A) TRUE - it’s called the Multiple IRR Problem B) the NVP rankings depend on the CoC c) the IRR method assumes reinvestment at IRR (which is not good). NPV assumes reinvestment at CoC (perfect and realisitic) d) TRUE - it’s the same as Safety First Criterion - Dinesh S