Asked by Lauren Allysé on May 03, 2024
Verified
Which statement regarding the IRR method 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 does not assume that the cash flows to be received from a project can be reinvested at a rate other than the IRR itself.
IRR Method
A financial analysis technique used to evaluate the desirability of investments or projects based on their internal rate of return, aiming to identify the profitability and potential return.
Time Value of Money
The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
Cost of Capital
The rate of return a company must offer investors to finance its assets, essentially a benchmark that a project must meet or exceed for it to be considered viable.
- Comprehend the Internal Rate of Return (IRR) and how it's used in project evaluation.
- Learn about the reinvestment assumption differences between NPV and IRR.
Verified Answer
ZK
Zybrea KnightMay 06, 2024
Final Answer :
D
Explanation :
The IRR method assumes that all cash flows generated by the project can be reinvested at the internal rate of return itself, which may not always be realistic or achievable in practice. This is a known limitation of the IRR method.
Learning Objectives
- Comprehend the Internal Rate of Return (IRR) and how it's used in project evaluation.
- Learn about the reinvestment assumption differences between NPV and IRR.