# Q.IRR is least appropriate to differentiate

V5-21 It is least appropriate to use the internal rate of return (IRR) rule to differentiate between mutually exclusive projects when either the projects’ scale or cash flow timing, respectively, is: Scale of the projects----------------- Cash flow timing A. Similar -----------------Similar B. Similar ----------------Different C. Different ----------------Similar D. Different ---------------Different ------------------------------------------------------------- my guess: C "when scale of projects different, NPV is best. when cash flow timing similar , ie.slope NPV profile similar, may have same IRR,should use NPV rule. If CF timing different, will have different IRR to identify better project.

D

pepp Wrote: ------------------------------------------------------- > D why?

If scale is different, its possible that IRR will conflict with NPV. similarly if Cash flows are different then IRR can also conflict with NPV And the question asks, when does IRR conflict with NPV.

B

man what is the answer… i am getting most of these wrong, starting to worry.

Anyone has a clue what the correct answer is? These kind of questions freak me out. Now I am going start studying Leases, Off Balance sheet items for the first time! god have so much to dooooo… study study study everyone.

I would say this is A. The question is about which of the situations would least likely need IRR for a decision between 2 mutually exclusive projects. When projects have similar scale and cash flow timing, don’t they have similar IRR? So what would the IRR need be?

Well, if scale and cash flows are same, then whether you use IRR or NPV you get the same result. so in this case IRR use would be appropriate. Question is asking when is it that IRR is inappropriate.

D. If the scales are diffent, IRR doesn’t work for sure. If cash flows timings are different , then one will have a different polynomial equation and the IRR will not be accurate.

venkuy Wrote: ------------------------------------------------------- > D. If the scales are diffent, IRR doesn’t work for > sure. If cash flows timings are different , then > one will have a different polynomial equation and > the IRR will not be accurate. I agree with you now.

There was a question like this on the mock exam. The answers are at home or I would post it.

amberpower Wrote: ------------------------------------------------------- > There was a question like this on the mock exam. > The answers are at home or I would post it. pls , thanks in advance.

the answer is D because for mutually exclusive project, the results are different, while for independent the results will be similar

I don’t remember the exact question but the answer had this explanation on the mock exam: Conflicting decision rules based on the NPV and IRR methods are related to the reinvestment rate assumption, timing of CFs, or the scale of the projects. Differing required rates of return are not related to conflicting NPV and IRR decisions. This goes along with the initial question…just wanted to add this gem for Annexguy.

D it is. Simple rule of thumb NPV is always better when you have mutually exclusive projects. comments: most fortune 500 companies use NPV and CAPM to do their capital budgeting. VC firms like payback b/c they have 3-5 year window and then want to exit