Which of the following statements regarding internal rate of return (IRR), net p

Question

Which of the following statements regarding internal rate of return (IRR), net present value (NPV), and modified internal rate of return (MIRR) is CORRECT?
A. If the NPV of a project is zero, the discount rate will be equal to the IRR.
B. Conflicts between NPV and IRR methods arise when the cost of capital exceeds the crossover point.
C. The likelihood of differences between MIRR and NPV methods increases as the differences in lives between two projects rises.
D. If capital projects differ in size, the net present value model tends to favor smaller projects.

Explanation / Answer

Correct answer: A The key difference between IRR and NPV relates to the objective of the models; a percentage rate for IRR and a direct dollar amount for NPV. Conflicts between IRR and NPV only exist if the cost of capital is less than the crossover point. NPV and MIRR methods give conflicting results only if the projects under consideration vary in size. If project sizes differ, the NPV method tends to favor larger projects (i.e., earning a slightly lower rate on a much larger project enhances NPV).

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