Question

Multiple choice:

1. The IRR system of project evaluation for selecting one of two mutually exclusive projects

   1. a) has the disadvantage or ignoring future cash flows, similar to that of the discounted payback period rule.

   2. b) may give different results from NV if the two projects have a different scale of investment and cash flow returns.

   3. c) should always be used in conjunction with the discounted payback system of project evaluation.

   4. d) always provides at least one value for the IRR of each of the projects.

   5. e) is consistent with both b) and d) above.

   6. f) is consistent with a), c) and d) above.

Answer 1

Hi Firend,

Please find the solution below.

Answer is (E)

Justification.

The internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

(A) The IRR method concerns itself with the projected Future cash flows generated by a capital injection.

(B) IRR will vary with the change of Scale or Time span of investments.

(C) Although IRR is an appealing metric to many, it should always be used in conjunction with NPV for a clearer picture of the value represented by a potential project a firm may undertake.

(D) Whenever we calculate IRR of any project, it will derive at least one rate at which both outflows and inflows will be at Par.