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Which of the following statements about internal rate of return (IRR) is false? explain why IRR...

Which of the following statements about internal rate of return (IRR) is false? explain why

  1. IRR is the discount rate at which the present value of future expected cash flows is exactly equal to the initial investment.
  2. The IRR rule always leads to the same decision as the NPV rule.
  3. IRR is the discount rate at which a project's NPV equals zero.
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Answer #1

Statement b, the IRR rule always leads to the same decision as the NPV rule is false.

This is because both the capital budgeting tools use different criteria for accepting a project. In case of net present value, the projects with a positive net present value is accepted and projects with a negative net present value is rejected. While in case of internal rate of return, if the internal rate of return is higher than the required rate of return, the project is accepted and if it is lesser than the required rate of return, it is rejected.

This conflict arises when the projects are mutually exclusive. It can also occur because of the size of the projects.

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

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