... 4.8%. Graph 1 however indicates this is an incorrect decision when the cost of capital is between 4.8% and 13.45%. C) Both the IRR and the NPV take account of time value of money, but situations arise where the IRR method leads to different decisions being made from those that would implement the NPV method. Mutually exclusive projects exist when there is acceptance of one project excludes the acceptance of another. The following example will illustrate how the NPV and the IRR lead to different decisions. Initial Investment Outlay Net Inflow End Of Year (£) 1 2 3 Project A £7000 3430 3430 3430 Project B £12000 5520 5520 5520 Cost of Capital = 10% The NPV and IRR calculations are as follows: IRR (%) NPV (£) Project A 22 1530 Project B 18 1728 Source: Principles of Corporate Finance, 6th edition Brealy and Myers The IRR ranks A first and NPV ranks B first. If the projects were independent this would be irrelevant, since both ...

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