Multiple choice

Even when two projects are mutually exclusive, capital rationing results in accurate ranking by

  1. NPV method only

  2. IRR method only

  3. NPV as well as IRR method

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Mutually exclusive projects are projects in which acceptance of one project excludes the others from consideration. In such a scenario, the best project is accepted. NPV and IRR conflict, which can sometimes arise in case of mutually exclusive projects, becomes critical. The conflict either arises due to the relative size of the project or due to the different cash flow distribution of the projects. Since NPV is an absolute measure, it will rank a project adding more dollar value higher regardless of the original investment required. IRR is a relative measure, and it will rank projects offering best investment return higher regardless of the total value added.

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