GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Life disparity
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Size disparity
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Time disparity
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All of the above
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Detailed explanation-1: -Conflicts in ranking of NPV and IRR arise when the project is mutually exclusive as in independent projects decisions are always clear. It becomes difficult to choose from higher NPV and higher IRR. Even size of the project and uneven cash flows can lead to ranking conflicts.
Detailed explanation-2: -Ranking conflicts between NPV and IRR: For single and independent projects with conventional cash flows, there is no conflict between NPV and IRR decision rules. However, for mutually exclusive projects, the two criteria may give conflicting results.
Detailed explanation-3: -Sometimes the NPV and IRR can favor conflicting project choices. Such conflicts may be dealt with by considering the mutuality of the project, value additivity principle, multiple rates of return and reinvestment rate assumption.
Detailed explanation-4: -However, when comparing two projects, the NPV and IRR may provide conflicting results. It may be so that one project has higher NPV while the other has a higher IRR. This difference could occur because of the different cash flow patterns in the two projects.