IFT Notes for Level I CFA® Program
IFT Notes for Level I CFA® Program

# Part 4

### 4.8. Ranking Conflicts between NPV and IRR

For single and independent projects with conventional cash flows, there is no conflict between NPV and IRR decision rules. However, for mutually exclusive projects the two criteria may give conflicting results. The reason for conflict is due to differences in cash flow patterns and differences in project scale.

Example (Ranking conflict due to differing cash flow patterns)

The cash flow associated with Project X and Project Y is shown below:

 Year 0 1 2 3 4 Project X -400 160 160 160 160 Project Y -400 0 0 0 800
1. Which project do you select according to the NPV rule using a rate of 10%?
2. Which project do you select according to the IRR rule?
3. Show the NPV profile for both projects.

Solution:

Let us first calculate the NPV and IRR for the two projects.