NPV and IRR Methods: Differences
Thus, in the case of independent conventional investments that NPV and IRR methods will give concurrent results. However, in certain situations they will give that, if the NPV method finds one proposal acceptable, IRR favor another. This is so in the case of mutually exclusive investment projects. If there are alternative courses of action. only one can be accepted. Such alternatives are mutually exclusive. The mutual of the investment projects may be of two types: (i) technical, and (ii) financial. The technical exclusiveness to alternatives having-different probabilities and the selection of that alternative which is the most profitable. Thus, in the case of a purchase or lease decision the more profitable out of the two will be selected. The mutual exclusiveness may also financial. If there arc resource constraints a firm will be forced to select that project which is most profitable rather than all projects which exceed a minimum acceptable level say, The due to limited funds is popularly known as capital rationing,
The different ranking given by the NPV and IRR methods can be illustrated under the follow heads.
1. Size-disparity problem;
2. Time-disparity problem, and
3. Unequal expected lives