Investment Decision Rules

Standalone Projects:

For projects with conventional cash flows: NPV rule and IRR rule are consistent. For projects with non-conventional cash flows:

• Delayed investment (positive cash flows precede negative cash flows)
  • Use NPV rule
  • IRR rule is unreliable.

Alternative Decision rule: Payback Rule

Mutually Exclusive Projects

For projects with different scales and different timing of cash flows:

• Use NPV rule
• IRR rule is subject to limitations in comparison
  • Adjustments to use IRR rule
    • Compute Crossover point (incremental IRR)
    • Then use IRR rule based on Incremental IRR

For projects with different lives:

• Compute Equivalent annual annuity (EAA)