Which of the following is false?
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A. B. C. D.D
Remember to always use the NPV result. There are quite a few problems with using other decision rules like IRR and payback period.
Let's go through each option one by one and analyze whether it is true or false:
A. The IRR rule is not dependable when applied to projects with non-normal cash flows. The statement in option A is true. The internal rate of return (IRR) rule can be unreliable when applied to projects with non-normal cash flows. Non-normal cash flows refer to projects where the cash flows change sign more than once during the life of the project. In such cases, the IRR rule may yield multiple IRRs or no real IRR at all, making it difficult to interpret and apply the rule effectively. Therefore, option A is a true statement.
B. For independent projects with normal cash flows, the IRR and NPV rules give the same accept/reject results. The statement in option B is false. The internal rate of return (IRR) and net present value (NPV) rules can give different accept/reject results for independent projects with normal cash flows. The IRR rule suggests accepting a project if its internal rate of return is greater than the required rate of return, while the NPV rule suggests accepting a project if its net present value is positive. Although these two rules often lead to the same decision, they can diverge when projects have different cash flow patterns or when the discount rate is not consistent with the cash flows. Therefore, option B is a false statement.
C. For mutually exclusive projects, the IRR and NPV rules can give conflicting results. The statement in option C is true. Mutually exclusive projects are projects where selecting one project automatically means rejecting the others. In such cases, the IRR and NPV rules can provide conflicting recommendations. The IRR rule may suggest accepting one project, while the NPV rule may indicate accepting a different project. This occurs when the projects have different investment sizes or cash flow patterns. Therefore, option C is a true statement.
D. None of these answers. Option D is an incorrect answer because options A, B, and C have already been evaluated, and we found that options A and C are true while option B is false. Therefore, option D cannot be the correct answer.
In summary, the false statement among the options is B. For independent projects with normal cash flows, the IRR and NPV rules do not always give the same accept/reject results.