The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?
A)One of the time periods within the investment period has a cash flow equal to zero.
B)The initial cash flow is negative.
C)The investment has cash inflows that occur after the required payback period.
D)The investment is mutually exclusive with another investment under consideration.
E)The cash flows are conventional.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) can be unreliable in making investment decisions when comparing mutually exclusive investments. This is because IRR assumes that the cash flows from the investment can be reinvested at the same rate, which may not be the case when choosing between multiple investments with different cash flow patterns. In these situations, other methods such as net present value (NPV) or profitability index (PI) should be used to evaluate the investments. Choices A, B, C, and E are not necessarily factors that make IRR unreliable as an indicator of whether or not an investment should be accepted.

The Internal Rate of Return Is Unreliable as an Indicator