COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the IRR deals with cash flows.
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the IRR gives equal regard to all returns within a project’s life.
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the IRR will always give the same project accept/reject decision as the NPV.
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the IRR requires long, detailed cash flow forecasts.Answer:D
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Detailed explanation-1: -Limitations Of IRR It ignores the actual dollar value of comparable investments. It does not compare the holding periods of like investments. It does not account for eliminating negative cash flows. It provides no consideration for the reinvestment of positive cash flows.
Detailed explanation-2: -A disadvantage of using the IRR method is that it does not account for the project size when comparing projects. Cash flows are simply compared to the amount of capital outlay generating those cash flows.
Detailed explanation-3: -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 high-IRR project, so the company may not be able to reinvest at the IRR.
Detailed explanation-4: -The internal rate of return, or IRR, is the interest rate where the net present value of all cash flows from a project or an investment equal zero. IRR involves positive and negative cash flows. It is used to evaluate how attractive a specific investment or project happens to be.