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NEW QUESTION: 1
Which of the following are necessary conditions for the NPV and IRR methods to produce similar rankings? Choose the best possible answer.
A. Projects must be mutually exclusive and of equal scale
B. Projects must be independent and have normal cash flows
C. Projects must have normal cash flows, and must be equal in scale and lifespan
D. Projects must be of equal scale and have equal lifespans
E. Projects must be mutually exclusive and have normal cash flows
Answer: C
Explanation:
Explanation/Reference:
Explanation:
When examining mutually exclusive projects with equal lifespans and of equal size, the IRR and NPV calculations will produce similar ranking results as long as the projects under examination have "normal" cash flows. It is when the projects under examination have "non-normal" cash flows that the IRR method can experience some difficulty. Non-normal cash flows are defined as cash flows in which negative cash inflows are juxtaposed within a series of positive cash inflows, creating a situation in which the sign will change more than once. When examining these "non-normal" projects, the Internal Rate of Return calculation will often produce multiple answers which leads to an incorrect accept/reject decision. In any examination in which the IRR and NPV produce conflicting rankings, the NPV calculation should be used.


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