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10. You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool...

10. You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision​ is: A. IRR. B. incremental IRR. C. profitability index. D. NPV.

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Answer #1

Net Present Value is the most appropriate out of them.


There are projects where you will find multiple IRR. For example, if you project has initial investment, then cash inflow for two years, then again cash outflow and then cash inflows for next year onwards, you will find two IRR. Same problem will be there in Incremental IRR also. Which of the rates will you consider accurate and appropriate for your project? Profitability Index will fail in times of capital rationing. So, it leaves only NPV as the most appropriate choice.

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