Assertion (A) : When two or more investment proposals are mutually exclusive, ranking the proposals on the basis of IRR, NPV and PI methods may give contradictory results. Reason (R) : The contradictory results in the ranking are due to differing dimensions relating to the scale of investments, cash flow patterns and project lives. Indicate the correct answer : Codes :
(A) is true, but (R) is a necessary condition, but not a sufficient condition.
Assertion: for independent projects the NPV, IRR and PI methods give the same accept-reject decision. For mutually exclusive projects, however, they may rank the proposals differently, so the Assertion is true.
Reason: the conflicts arise when projects differ in scale of investment (size disparity), in the pattern or timing of cash flows (time disparity) or in their lives (life disparity). These differences are the setting in which conflicting rankings appear, so the Reason states a correct condition.
However, such differences do not by themselves produce a conflict. The underlying cause is the different reinvestment-rate assumption: NPV implicitly assumes intermediate cash flows are reinvested at the cost of capital, while IRR assumes reinvestment at the project’s own IRR, and PI, being a ratio, ignores absolute size. Two projects may differ in scale or timing and still be ranked alike if their NPV profiles do not cross (Fisher’s intersection) at a rate above the cost of capital.
So the Reason is necessary for a conflict but not sufficient to explain it, which is the accepted judgement.
Hence, (A) is true, but (R) is a necessary condition, but not a sufficient condition.
Similar Questions
Which of the following techniques for appraisal of investment proposals are based on time value of money ?
(a) Accounting Rate of Return
(b) Internal Rate of Return
(c) Profitability Index Method
(d) Earnings Per Share
Codes :
Which of the following is not true with reference to capital budgeting ?
In certainty equivalent approach, adjusted cash flows are discounted at :
In capital budgeting, the term capital rationing implies :
Interim cash inflows are reinvested at a rate of return equal to the internal rate of return is the built-in-mechanism for
Match the items of the following two lists and suggest the correct code :
List – I List – II a. Pay-back Rate of Return i. Discounted Cash Flow Technique b. Internal Rate of Return ii. Compounded values of investments and returns c. Benefit Cost Ratio iii. Crude method for project evaluation d. Net Terminal Value Method iv. Varying sized projects evaluation Codes :
a b c d
Formula for net cash inflow of a project is :
Important Questions from Capital budgeting decisions
- Under which one of the following situation a firm can not raise capital for a project under any circumstance ?
- Which of the following statement about Finance lease is NOT true ?
(i) Finance lease transfer substantially all the risks and rewards incidental to ownership of an asset.
(ii) The lease period in a finance lease covers a substantial portion of the asset's economic life.
(iii) Payment towards lease rental in finance lease cover all cast incurred by lessor in obtaining the assets.
(iv) Finance lease is considered short-term in nature. - Assertion (A): Compounding interest allows an investment to grow faster over time compared to simple interest.
Reason (R): Simple interest earns interest on Previously earned interest. Which of the following variables is not known in Internal Rate of Return methods of capital budgeting?
- As per the Union Budget 2022, how many crore has been made to cover 3.8 crore households in 2022-23 under Har Ghar, Nal Se Jal Scheme?
