Question

When considering internal rate of return (IRR), which statement(s) is/are correct?

I. The IRR method of analysis can be adapted to handle non-conventional cash flows.
II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate.
III. The IRR tends to be used more than net present value simply because its results are easier to comprehend.
IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

Answer 1

All the above 4 statments are correct.

1. Non-conventional cash flows generates a series of cashflows( both inward and outward), which might make it difficult to handle NPV analysis.

2. Crossover rate is that rate of return where the NPV of 2 different projects meet.

3. IRR gives the details in percentage terms instead of absolute terms, as is the case with NPV. Hence IRR is used more

4. Since IRR calculates all cash flows reinvested using the same discount rate, which is not the case in real life.hence the timing and amount of cash flows will have an impact in the IRR