Final answer:
The statement is false as the NPV is generally considered more reliable than IRR when they provide inconsistent rankings. NPV measures the actual increase in value to the firm, while IRR does not account for certain financial considerations like the scale of investment and reinvestment rates.
Step-by-step explanation:
The statement 'When NPV and IRR analysis provide inconsistent rankings of projects, the financial manager should generally select the project with the highest IRR' is false. In cases where Net Present Value (NPV) and Internal Rate of Return (IRR) provide inconsistent results, the general rule of thumb is to prefer the project with the higher NPV. This is because NPV directly measures the increase in value to the firm and is a direct reflection of the goal of financial management, which is to maximize shareholder wealth.
IRR is a rate of return measure that specifies the percentage rate at which the project's cash flows need to grow to break even. While a high IRR can be attractive, it may not account for the scale of investment, the reinvestment rate for the cash flows, or other financial considerations such as the cost of capital. NPV, meanwhile, takes into account the time value of money and provides a dollar amount that represents the potential increase in wealth.
In summary, while both NPV and IRR are important in capital budgeting decisions, they can sometimes give different project rankings due to different assumptions, and in these cases, NPV is generally considered the more reliable guide for decision-making.