Internal Rate of Return is not the best tool for analyzing corporate investment
ID: 2802283 • Letter: I
Question
Internal Rate of Return is not the best tool for analyzing corporate investment projects because
It is difficult to use this analytical tool
You are unable to determine the actual rate
The method assumes cash flows are reinvested at the rate determined by the IRR
The method ignores how long it takes to recover the initial investment
a.It is difficult to use this analytical tool
b.You are unable to determine the actual rate
c.The method assumes cash flows are reinvested at the rate determined by the IRR
d.The method ignores how long it takes to recover the initial investment
Explanation / Answer
It is not only return, but also the payback/discounted payback that companies consider. IRR only calculates the actual return but cannot calculate payback/discounted payback period.
Hence, correct option is (d) The method ignores how long it takes to recover the initial investment.
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