# The irr method of capital budgeting maintains that

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The IRR method of capital budgeting maintains that projects should be accepted if their IRR is greater than the cost of capital. Strict adherence to the IRR method would further dictate that mutually exclusive projects should be chosen on the basis of the greatest IRR. In this scenario, both franchises have IRRs that exceed the cost of capital (10%) and both should be accepted, if they are independent. If, however, the franchises are mutually exclusive, we would choose Franchise S. Recall, that this was our determination using the NPV method as well. The question that naturally arises is whether or not the NPV and IRR methods will always arrive at the same conclusion. When dealing with independent projects, the NPV and IRR methods will always yield the same accept/reject result. However, in the case of mutually exclusive projects, NPV and IRR can give conflicting results. One shortcoming of the internal rate of return is that it assumes that cash flows received are reinvested at the project's internal rate of return, which is not usually true. The nature of the congruence of the NPV and IRR methods is further detailed in a latter section of this model.
e. (1) Draw NPV profiles for Franchises L and S. At what discount rate do the profiles cross?
(2) Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which franchise or franchises should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any cost of capital less than 23.6%?
two franchises' profiles (S and L) intersect the X-axis at costs of capital of 18.13% and 23.56%, respectively. Not coincidently, those are the IRRs of the franchises. If we think about the definition of IRR, we remember that the internal rate of return is the cost of capital at which a project will have an NPV of zero. Looking at our graph, it is a logical conclusion that the project IRR is defined as the point at which its profile intersects the X-axis." f. What is the underlying cause of ranking conflicts between NPV and IRR?