Schweser EOC concept checkers reading 6

wait, what is the right answer? B or C?

There is disagreement!

B is correct. The keyword is “independent projects”.

B would be wrong if its “mutually exclusive”. Especially when IRR and NPV indicate a contradicting decision, always go with NPV.

If the NPV is negative that means your project isn’t making any or enough money to compensate the investor’s require rate of return which is your discount rate.

For example, you took up a loan of $100k for a project and the rate of the loan is 10%, however your project is generating cash flows of $15k each year for 10 years. Your NPV would be -$7.8k, though it’s making money but it’s not enough to compensate the minimum or required rate. So only positive NPV should be accepted.

I think the reason it is C is because there are times when IRR and NPV do yield the same result.

While options given is C is always incorrect.

@diya

C is the answer

@bendujamin – B is correct. It’s only when evaluating mutually exclusive projects (i.e. either project A or B) that it may show conflicting results, mainly due to cash flow timing or project sizes differences.

I agree with Diya

I think that the “regardless of the sign” in choice C should jump as a totally false statement (it’s basically saying that if there are two projects, one +300 NPV, the other -50000 NPV, you would accept the latter because the absolute number is larger BUT IN REALITY YOU NEED POSITIVE NPV!!)