COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Simple to use.
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Gives information that investors want.
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Project can have multiple IRR in one time.
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Easy to make a decision.
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Detailed explanation-1: -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. When a project has multiple IRRs, it may be more convenient to compute the IRR of the project with the benefits reinvested.
Detailed explanation-2: -The multiple IRR problem poses a series problem to analysts because the decision is not obvious. IRR decision rule involves comparison of project IRR with the hurdle rate. If there are two values for IRR, we do not know which value to compare with hurdle rate.
Detailed explanation-3: -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-4: -More than one internal rate of return from the same project that makes the net present value of the project equal to zero. This situation arises when the internal rate of return method is used for a project in which negative cash-flows follow positive cash-flows.