Which of the following statements is CORRECT A projects NPV

Which of the following statements is CORRECT? A project\'s NPV depends on the total amount of cash flows the project produces, and the cash flows are discounted at the rate of IRR instead of the WACC The NPV and IRR methods may give different recommendations regarding which of two same recommendation regarding the acceptability of a normal, independent project The NPV method is regarded by most academics as being the best indicator of a project\'s disregard other methods. B) mutually exclusive projects should be accepted, but generally speaking, they always give the c) profitability, hence most academics recommend that firms use only this one method and The NPV method was once the favorite of academics and business executives, but today D) most authorities regard the MIRR as being the best indicator of a project\'s profitability. Save

Solution

Option b is correct.

Because in case of independent project if they add value to company and gives positive NPV there is no conflict between irr and NPV.

However problem arise when we evaluate mutually exclusive projects. Since NPV is an absolute measure, it will rank a project adding more dollar value higher regardless of the original investment required. IRR is a relative measure, and it will rank projects offering best investment return higher regardless of the total value added.