Which of the statements below is TRUE? One problem with IRR as a decision rule is...
Which of the statements below is TRUE?
One problem with IRR as a decision rule is that if the cash flow is not standard, there is a possibility of multiple IRRs for a single project.
When we talk about standard cash flow for a project, we assume an initial cash outflow at the beginning of the project and negative cash flows in the future.
For every period that the cash flow has a change of sign (negative to positive or positive to negative), the NPV profile could cross the y-axis, generating a MIRR.
When we apply IRR to standard cash flow, we have the potential for more than one IRR solution.
Homework Answers
The correct statement is
One problem with IRR as a decision rule is that if the cash flow is not standard, there is a possibility of multiple IRRs for a single project.
Standard cash flows are when there is an outflow at the beginning and inflows during the life of the project i.e. positive cash flows
When the cash flows are not standard, i.e. when there are inflows and outflows during the life, there are multiple IRRs
When the cash flows are standard, there is one one IRR
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Which of the statements below is TRUE?
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Third Blank: IRR, MIRR, required rate of return
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expenditures, followed only by cash inflows.
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First Blank: always, sometimes, never
Second Blank: IRR, MIRR, required rate of return
Third Blank: IRR, MIRR, required rate of return
Fourth Blank: IRR method, NPV method
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When might the IRR rule provide different guidance regarding
project selection than the NPV rule?
a) When a project has net expenditures (costs) that occur after
positive cash inflows.
b) When a project has two or more years of initial net
expenditures, followed only by cash inflows.
c) When a project has multiple IRRs.
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amounts.
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