A选项为何不对

问题如下：

Investments 1 and 2 have similar outlays, although the patterns of future cash flows are different. The cash flows, as well as the NPV and IRR, for the two investments are shown below. For both investments, the required rate of return is 10%.

The two projects are mutually exclusive. What is the appropriate investment decision?

选项：

A.Invest in both investments. B.Invest in Investment 1 because it has the higher IRR. C.Invest in Investment 2 because it has the higher NPV.

解释：

Solution

C is correct. When valuing mutually exclusive investments, the decision should be made with the NPV method because this method uses the most realistic discount rate—namely, the opportunity cost of funds. In this example, the reinvestment rate for the NPV method (here, 10%) is more realistic than the reinvestment rate for the IRR method (here, 21.86% or 18.92%).