Question

whcih of the following statments about the internal rate of return (IRR) is true? a. it has the most conservative and realisitc reinvestment assumption. B. it never gives conflicting answers. C. it fully considers the time value of money g

Answer 1

Answer:

c

Explanation:

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested. It is a capital budgeting method.

IRR can give conflicting answers when negative cash flow in mixed with positive cash flows during the life of the project. that is the negative cash flow does not occur at the beginning of the project

IRR considers the time value of money

Consider two sceneries

In the first scenario, 50,000 is invested in a project, the cash flow in year 1 and 2 is 0. the cash flow in year 3 is 150,000. IRR is 44.2%

n the second scenario, 50,000 is invested in a project, the cash flow in year 1 is 50,000. cash flow in year 2 100,000 and 3 is 0 . IRR is 100%

IRR gives higher value to cash flows occurring in earlier years