Which one of the following statements is correct?
A) The internal rate of return is the most reliable method of analysis for any type of investment decision.
B) The payback method is biased towards short-term projects.
C) The modified internal rate of return is most useful when projects are mutually exclusive.
D) The average accounting return is the most difficult method of analysis to compute.
E) The net present value method is only applicable if a project has conventional cash flows.

Question

Quizplus · Accepted Answer

The payback method emphasizes the quick recovery of the initial investment, making it biased towards short-term projects. The other statements are incorrect or only partially true. The internal rate of return may give misleading results if the project has non-conventional cash flows, the modified internal rate of return is useful in comparing projects with different investment horizons and sizes, and the average accounting return is easy to compute but has limitations in measuring the profitability of a project. The net present value method can handle non-conventional cash flows as well as unconventional timings of cash flows.

Which One of the Following Statements Is Correct