COST ACCOUNTING
CAPITAL BUDGETING
Question
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does not fully consider the time value of money.


does not give proper weight to all cash flows.


can result in multiple rates of return (more than one IRR).


is expressed as a percentage.

Detailed explanation1: The disadvantage of the internal rate of return is that the method does not consider important factors like project duration, future costs, or the size of a project. The IRR simply compares the projectâ€™s cash flow to the projectâ€™s existing costs, excluding these factors.
Detailed explanation2: The IRR assumes that the cash flows are reinvested at the internal rate of return when they are received. This is a disadvantage of the IRR method. The firm may not be able to find any other projects with returns equal to a highIRR project, so the company may not be able to reinvest at the IRR.
Detailed explanation3: Multiple Internal Rates of Return: As cash flows of a project change sign more than once, there will be multiple IRRs. NPV is a preferable metric in these cases.
Detailed explanation4: The ultimate goal of IRR is to identify the rate of discount, which makes the present value of the sum of annual nominal cash inflows equal to the initial net cash outlay for the investment. IRR is ideal for analyzing capital budgeting projects to understand and compare potential rates of annual return over time.