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In: Finance

‘Evaluating mutually exclusive projects using the IRR and NPV approaches can be problematic’. Discuss this statement...

‘Evaluating mutually exclusive projects using the IRR and NPV approaches can be problematic’. Discuss this statement with examples.

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Expert Solution

Evaluation of the mutually exclusive projects using internal rate of return and net present value can be problematic because when there will be net present value of two projects which are mutually exclusive and those two projects are having unequal lives, then it will not be feasible to select the project with net present value method because that will not be providing the company with the best project as Net present value method is not providing with the best result, when we are comparing two projects which are mutually exclusive in nature.

When we are calculating two projects with unequal lives with internal rate of return method or when multiple cash flows are there, then internal rate of return will not be providing with the best rate of return, and hence we should be trying to get rid of all such problems by implementation of equivalent annual annuity method which will be considering all such products which are having unequal lives and they are mutually exclusive in nature.

For example, if we have two projects and both projects are having unequal life then they will not be providing the best result with net present value method when they will be mutually exclusive

jeff jeffy answered 1 year ago
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