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Npv Irr Essay

317 words - 2 pages

The NPV and IRR methods would in certain situations give the same accept-reject decision. But they may differ in the sense that the choice of an asset under certain circumstances may be mutually contradictory. The two methods would give consistent results in terms of acceptance or rejection of investment proposals in certain situations such as conventional investments or independent proposals. A conventional investment is one in which the cash flow pattern is such that an initial investment is followed by a ...view middle of the document...

However, in certain situations they will give contradictory results. This is so in the case of mutually exclusive investment projects. The examples of such projects are technical exclusiveness and financial exclusiveness. The term technical exclusiveness refers to alternatives having different profitabilities and the selection of that alternative which is the most profitable. Thus, in the case of a purchase or lease decision the more profitable out of the two will be selected. The mutual exclusiveness may also be financial. If there are resource constraints, a firm will be forced to select that project which is the most profitable rather than accept all projects which exceed a minimum acceptable level. The exclusiveness due to limited funds is popularly known as capital rationing. The three reasons that these two methods disagree are the size-disparity problem, the time disparity problem, and the unequal expected lives. Size disparity arises when the initial investment in mutually exclusive projects is different. Time disparity arises when the cash flow pattern of mutually exclusive projects is different. And when the projects have different expected lives, disparity arises.

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