The two fatal flaws of the internal rate of return rule are:
A) arbitrary determination of a discount rate and failure to consider initial expenditures.
B) arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects.
C) arbitrary determination of a discount rate and the multiple rate of return problem.
D) failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects.
E) failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) rule fails to correctly analyze mutually exclusive projects because it may favor projects with higher percentage returns rather than higher absolute returns. Additionally, the multiple rate of return problem occurs when a project has non-conventional cash flows, leading to multiple IRRs.

The Two Fatal Flaws of the Internal Rate of Return