Question

Which of the following statements is CORRECT?

A) One defect of the IRR method is that it does not take account of
cash flows over a project’s full life.

B) One defect of the IRR method is that it does not take account of
the time value of money.

C) One defect of the IRR method is that it does not take account of
the cost of capital.

D) One defect of the IRR method is that it values a dollar received
today the same as a dollar that will not be received until sometime
in the future.

E) One defect of the IRR method is that it assumes that the cash
flows to be received from a project can be reinvested at the IRR
itself, and that assumption is often not valid.

Answer #1

Internal Rate of Return is the rate of return that makes the net present value of all cash flows of a certain investment equal to zero. It is helpful in comparing investments and making capital budgeting decisions.

If the internal rate of return is higher or equal to the cost of capital, the project should be accepted. If the internal rate of return is lesser than the cost of capital, the project should be rejected.

One disadvantage of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Hence, the answer is **option e.**

In case of any query, kindly comment on the solution.

Which of the following statements is NOT
CORRECT?
a.
The IRR method takes into account the time value of money
b.
The IRR method values a dollar received today greater than a
dollar that will be received until sometime in the future
c.
The IRR method takes into account the cash flows over a
project’s full life
d.
The IRR method assumes that the cash flows to be received from a
project are to be reinvested at the WACC

You are planning to retire in 17 years and figure you will need
$2 million in your 401K. Your current balance is $300,000 and you
plan to make 17 annual contributions of equal size over the next 17
years beginning one year from today. How much does the size of your
payment need to be to meet your goals if you expect your 401K to
earn 7% per year?
Group of answer choices
a. $29,001.42
b. $39,958.00
c. None of...

1. Which of the following statements is CORRECT?
A. One problem of the IRR method is that it does not consider
all cash flows of a project.
B. One problem of the IRR method is that it does not take into
account the time value of money.
C. One problem of the IRR method is that it does not consider
the reinvestment of cash inflows.
D. One problem of the IRR method is that a dollar received today
is valued...

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Blue Llama Mining Company is analyzing a project that requires
an initial investment of $450,000. The project’s expected cash
flows are:
Year
Cash...

Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Fuzzy Button Clothing Company is analyzing a project that
requires an initial investment of $500,000. The project’s...

The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Green Caterpillar Garden Supplies Inc. is analyzing a project
that requires an initial investment of $400,000. The project’s
expected cash flows are:
Year...

4. Modified internal rate of return (MIRR)
The IRR evaluation method assumes that cash flows from the
project are reinvested at the same rate equal to the IRR. However,
in reality the reinvested cash flows may not necessarily generate a
return equal to the IRR. Thus, the modified IRR approach makes a
more reasonable assumption other than the project’s IRR.
Consider the following situation:
Cold Goose Metal Works Inc. is analyzing a project that requires
an initial investment of $500,000....

The IRR evaluation method assumes that cash flows from the
project are reinvested at a rate equal to the project’s IRR.
However, in reality, the reinvested cash flows may not necessarily
generate a return equal to the IRR. Thus, using the modified IRR
approach, you can make a more reasonable estimate of a project’s
rate of return than the project’s IRR can.
Consider the following situation:
Cold Goose Metal Works Inc. is analyzing a project that requires
an initial investment...

Which of the following statements is CORRECT? Assume that the
project being considered has normal cash flows, with one outflow
followed by a series of inflows. a. The IRR calculation implicitly
assumes that all cash flows are reinvested at the WACC. b. If a
project has normal cash flows and its IRR exceeds its WACC, then
the project’s NPV must be positive. c. If Project A has a higher
IRR than Project B, then Project A must also have a...

Which of the following statements is
correct?
Group of answer choices
Both the regular and the modified IRR (MIRR) methods have wide
appeal to professors, but most business executives prefer the NPV
method to either of the IRR methods.
The phenomenon called "multiple internal rates of return" arises
when two or more independent projects that have different lives are
compared to one another.
The IRR method is based on the assumption that projects' cash
flows are reinvested at the project's...

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