Asked by Chih-Hsiang Chang on May 26, 2024
Verified
The internal rate of return should:
A) Not be used for ranking mutually exclusive projects.
B) Only be applied to small projects.
C) Be relied upon more heavily than the net present value.
D) Always result in the same decision as discounted payback.
E) Lead to correct decisions when comparing mutually exclusive projects.
Mutually Exclusive Projects
Investment projects where the acceptance of one negates the possibility of accepting another.
Internal Rate Of Return
A measure employed in evaluating financial returns to gauge the potential profitability of investments.
- Familiarize yourself with the Internal Rate of Return (IRR) and its implementation in evaluating project proposals.
- Gain insight into the ideas and contrasts between mutually exclusive and independent projects.
- Understand the practical considerations and challenges in applying various project evaluation techniques.
Verified Answer
YC
Yasir ChandiaMay 30, 2024
Final Answer :
A
Explanation :
The internal rate of return (IRR) should not be used for ranking mutually exclusive projects because it can lead to incorrect decisions if the projects have different scales, cash flow patterns, or durations. The net present value (NPV) method is generally preferred for evaluating and comparing mutually exclusive projects because it directly measures the value added to the firm by undertaking the project.
Learning Objectives
- Familiarize yourself with the Internal Rate of Return (IRR) and its implementation in evaluating project proposals.
- Gain insight into the ideas and contrasts between mutually exclusive and independent projects.
- Understand the practical considerations and challenges in applying various project evaluation techniques.