Final answer:
Differences in scale and timing can affect the internal rate of return (IRR) and lead to incorrect decisions when comparing projects. These differences impact the calculation of IRR, potentially skewing comparisons. Differences in NPV alone do not improperly influence the IRR.
Step-by-step explanation:
The internal rate of return (IRR) rule can result in the wrong decision if the projects being compared have differences in two main aspects: scale and timing. Differences in scale refer to the size of the investment required for each project. A larger project with a bigger initial outlay may have a different IRR compared to a smaller project, potentially skewing comparisons solely based on IRR. Differences in timing can affect the IRR because early returns have a greater impact on the IRR calculation than returns received later. If one project returns cash earlier than another, it may have a higher IRR, which doesn't necessarily indicate it is a better investment over the long term. In contrast, differences in NPV (Net Present Value) do not incorrectly affect the IRR as NPV and IRR are related but distinct measures of investment performance. While NPV provides the value of an investment in today's dollars taking into account all future cash flows, IRR is the rate at which an investment breaks even in terms of NPV. Therefore, the correct options indicating when IRR might lead to the wrong decision are differences in scale and timing, making D. A and B the correct choice.