It is Least apropriate to use the IRR rule to differentiate between mutually exclusive projects when either the projects scale or cash flow timing, resectively, is: Scale of the projects, Cash flow timing A. Similar, Similar B. Similar, Different C. Different, Similar D. Different, Different I can narrow it down to B and D, but not sure about the Scale of projects…any ideas?
D. I can’t say for sure about scale, in terms of an explanation. A larger project could be riskier requiring a higher IRR thus the NPV would be a lot lower?
I’ll say D because: One of the defect of the IRR is that it does not account for the size of the project, so it you have two project with different scale, using the IRR can lead to choose a project with the lower NPV. Which is contrary to the rule that says when the NPV and IRR rank two project differently we should follow the NPV. Now the cash flows, the IRR place a small weight on early cash flows, which mean a project with 1000, 900, 800 will probably have higher IRR than a project with 800,900,1200 as streams of cash flows. As general rule: 1- When the NPV and IRR rank projects diffrently we should always follows the NPV 2- And the circumstance when the NPV and IRR rank project differently are: a) When the size or the scale of the project are different or/and b) When the timing of the projects cash flows differs.
Got it. Thanks a lot!!