An investments internal rate of return does not depend on the rate at which income from the investment is reinvested.

RISK AND RETURN

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

An investment’s internal rate of return does not depend on the rate at which income from the investment is reinvested.

A	True
B	False
C	Either A or B
D	None of the above

Explanation:

Detailed explanation-1: -In IRR method, the future value of cash inflows is determined based on an assumption only. Several rates may have to use to find out the initial rate of return and hence it is not appropriate for non-conventional cash flows.

Detailed explanation-2: -The internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate. IRR is calculated using the same concept as net present value (NPV), except it sets the NPV equal to zero.

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: -In addition to the portion of the metric that reflects momentum in the markets or the strength of the economy, other factors-including a project’s strategic positioning, its business performance, and its level of debt and leverage-also contribute to its IRR.

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ECONOMICS (CBSE/UGC NET)

ECONOMICS

RISK AND RETURN