When the Internal Rate of Return (IRR) Method and the Net

question 33

Multiple Choice

When the internal rate of return (IRR) method and the net present value (NPV) method do not yield the same recommendation for the same investment project, the project-selection decision should normally be based on:

• A) IRR, because all reinvestment of funds occurs at the rate of the cost of capital and because it takes into consideration the relative size of the initial investment.
• B) NPV, because it takes into consideration the relative size of the initial investment.
• C) IRR, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
• D) NPV, because all reinvestment of funds occurs at the discount rate that will make the NPV of the project equal to zero.
• E) IRR, because all reinvestment of funds occurs at the rate the project generates and because it takes into consideration the relative size of the initial investment.