Ahmad and Ayed were having a discussion about which financial model to use for their new business. Ahmad supports NPV and Ayed supports IRR. The discussion starts to get heated when Fahad steps in and states, "Gentlemen, it doesn't matter which method we choose, they give the same answer on all projects." Is Fahad correct? Under what conditions will IRR and NPV be consistent when accepting or rejecting projects?

Partially, Fahad is right. This is due to the fact that both strategies are used to make capital-budgeting decisions, and each has advantages and disadvantages. When assessing a single project, the NPV and IRR would yield the same conclusions on whether the project should be approved or rejected. When comparing the two projects, however, the NPV and IRR can yield contradictory results, with one project having a higher IRR while the other has a higher NPV.

Under what conditions will IRR and NPV be consistent when accepting or rejecting projects?

The cash flows for the projects should be normal.

The hurdle rate for IRR is the same as the discount rate for NPV.

Projects do not have to be mutually exclusive.

Step-by-step explanation

Tang, S. L., & John Tang, H. (2003). The variable financial indicator IRR and the constant economic indicator NPV. The Engineering Economist, 48(1), 69-78.