Question

The internal rate of return method of analysis a. May produce multiple rates of return when...

The internal rate of return method of analysis

a. May produce multiple rates of return when cash flows are conventional

b. May lead to incorrect decisions when comparing mutely exclusive projects

c Is rarely used in the business world today

d Is the preferred method of analysis when projects are either mutually exclusive or have unconventional cash flows

e Is dependent upon prespecified rates used to discount the cash flows

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Answer #1

Option b is correct

The internal rate of return method of analysis may lead to incorret decisions when comparing mutually exclusive projects because it ignores the size of initial investment.

In such a scenario, NPV method should be used, not IRR method.

Option a is incorrect because the IRR method of analysis may produce multiple rates of return when cash flows are unconventional.

Option c incorrect because it is widely used in the business world today

Option d incorrect because NPV method is preferred, not IRR method

Option e incorrect because IRR method is not dependent on the prespecified rates, but it is dependent on cash flows and timing of cash flows.

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