Question

What is IRR and why it may not be the best method to evaluate a project?

What is IRR and why it may not be the best method to evaluate a project?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

The IRR method simplifies projects to a single number that management can use to determine whether or not a project is economically viable. The result is simple, but for any project that is long-term, that has multiple cash flows at different discount rates, or that has uncertain cash flows - in fact, for almost any project at all - IRR isn't an effective measurement.

Thanks

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
We can use the IRR method to evaluate this project because there is only one sign...
We can use the IRR method to evaluate this project because there is only one sign change. True False
The IRR evaluation method assumes that cash flows from the project are reinvested at the same...
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...
The IRR evaluation method assumes that cash flows from the project are reinvested at the same...
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...
The IRR evaluation method assumes that cash flows from the project are reinvested at a rate...
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...
What are the best ways to evaluate investments. What is the best one and why?
What are the best ways to evaluate investments. What is the best one and why?
1. Which of the following statements is CORRECT? A. One problem of the IRR method is...
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...
to evaluate a project which would be the most accurate measure NPV, IRR, or payback period...
to evaluate a project which would be the most accurate measure NPV, IRR, or payback period also which is the easiest to calculate without a computer
The IRR evaluation method assumes that cash flows from the project are reinvested at the same...
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 $2,500,000. The project’s expected cash flows are: Year...
Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the...
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...
can irr of a project be greater than inflation rate ? why/why not?
can irr of a project be greater than inflation rate ? why/why not?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT