Two key weaknesses of the internal rate of return rule are the
A)arbitrary determination of a discount rate and failure to consider initial expenditures.
B)failure to correctly analyze mutually exclusive projects and the multiple rate of return problem.
C)failure to consider all cash flows and the multiple rate of return problem.
D)failure to consider initial expenditures and failure to correctly analyze mutually exclusive projects.
E)failure to correctly analyze mutually exclusive projects and the lack of a clear-cut decision rule.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) rule can struggle with mutually exclusive projects because it may not account for differences in scale and timing of cash flows. Additionally, the multiple rate of return problem arises when a project has non-normal cash flows, leading to multiple IRRs, which complicates the decision-making process.

Two Key Weaknesses of the Internal Rate of Return Rule