Question

NPV mathematically will give the correct accept-or-reject decision regardless of Whether the project experiences non-normal cash flows or if differences in project size or timing of cash flows exist in our case."

Would the IRR provides the correct accept -or-reject decision as the NPV ?

If you cannot eliminate the systematic risk, how can you reduce it if you hold a portfolio of several stocks?

Answer 1

No, the IRR would not provide the same correct decision as the NPV. The IRR will provide a different decision in these cases :

• If a project has a higher NPV, but a lower IRR, the IRR rule will say that the project with higher IRR should be accepted. However, the project with lower IRR (and higher NPV) will create more value. This is an example of a situation where IRR will provide a different decision than NPV
• If the project has negative cash flows in between the positive cash flows during the project life, there can be multiple IRRs.
• In case of projects with different sizes or lives, the IRR decision may differ from the NPV decision

Systematic risk is market risk. It cannot be reduced by diversifying. It can be reduced by asset allocation. If you hold a portfolio of stocks, systematic risk can be reduced by adding other asset classes such as commodities, bonds, alternative investments etc. to the portfolio