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Answer: Apply the opportunity cost of capital as the discount rate.
When comparing mutually exclusive projects, the net present value (NPV) criterion is strongly preferred over the internal rate of return (IRR) if their rankings conflict. The required rate of return, often termed the **opportunity cost of capital**, is the appropriate discount rate for NPV calculations. This rate reflects the return expected by capital providers given the project's risk. While the IRR rule suggests investing if IRR > r, it is less reliable for mutually exclusive projects. Therefore, the correct approach is to use the opportunity cost of capital as the discount rate (Option B).
Author: LeetQuiz Editorial Team
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When evaluating mutually exclusive projects, an analyst should:
A
Select the project with the highest internal rate of return (IRR).
B
Apply the opportunity cost of capital as the discount rate.
C
Choose projects where the IRR exceeds the opportunity cost of capital.
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