IRR Rule and Mutually Exclusive Investments: Difference in Timing (1) Even when projects have the same scale, the IRR may lead you to rank them incorrectly due to differences in the timing of the cash flows. Note that earning a high annual return is much more valuable if you earn it for several years than if you earn it for only a few days. IRR is a return, but the dollar value of earning a given return depends on how long the return is earned. -15 Assume discount rate of 10% What is IRR for each project? What is the NPV for each project? IRR Rule and Mutually Exclusive Investments: Difference in Timing (2) Even if the time horizon and scale is the same, timing of cash fiows can cause IRR into providing the wrong conclusion. B Cash Benefits Investment Initial Investment Year 1 Year 2 $10,000 $0 $14,400 $10,000 $10,000 $2,400 Assume discount rate is 10%. What is the IRR for each investment? What is the NPV for each investment? Is the conclusion from NPV different than IRR? Why