IRR and NPV may rank projects differently due to all of the following except _________. A....

IRR and NPV may rank projects differently due to all of the following except _________.

A. tax disparity
B. unequal lives
C. time disparity
D. size disparity

Solutions

Expert Solution

The correct answer is A.

Tax disparity.

Due to tax disparity between for 2 projects IRR and NPV will not rank projects differently as the cashflows of each year will be same for calculating NPV and IRR. Also the project time period will be same. In this case there will not be any disparity between NPV and IRR.

In other options IRR and NPV may rank projects differently as -

IRR and NPV may rank projects differently when the projects has unequal life. Since the IRR is as scaled measure it is biased for smaller projects which are more likely to provide higher return than larger projects. In larger projects the NPV will be more the the cash inflows will be for more no. of years. So in case of unequal life IRR and NPV may rank projects differently.

When there is time disparity for the cashflows of two different projects IRR and NPV may rank projects differently.

IRR and NPV may rank projects differently due to size disparity also. IRR will prefer the project which are smaller in size but NPV will be more of larger investment project.

Hope it helps!

jeff jeffy answered 1 year ago

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