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The reliability of this capital budgeting technique is diminished when applied to projects exhibiting unconventional cash...

The reliability of this capital budgeting technique is diminished when applied to projects exhibiting unconventional cash flows?

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Answer #1

The technique of capital budgeting which is diminished in unconventional cash flows is IRR,

Unconventional cash flows are the projects where the cash flows changes its sign more than once. In this project, there arises a multiple IRR problem. So, the IRR is not reliable, so instead of the IRR we use the MIRR technique.

So, in unconventional cash flows, technically no IRR exists. For example, if the IRRs are 8% and 13% and the hurdle rate is 10%, management will not have the confidence to go ahead with the investment.

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