Question

TB MC Qu. 11-59 (Static) A limitation of the internal rate of return... A limitation of the internal rate of return method is that it:

Answer 1

Limitations of the internal rate of return are:

1. A project can have more than one internal rate of return.
2. It fails to reflect varying levels of risk over a project's life.

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

If the internal rate of return is greater than the required return of the project, the project should be accepted. If this is not the case, the project should be rejected.

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