The internal rate of return is most reliable when evaluating:
A) a single project with alternating cash inflows and outflows over several years.
B) mutually exclusive projects of differing sizes.
C) a single project with only cash inflows following the initial cash outflow.
D) a single project with cash outflows at time 0 and the final year and inflows in all other time periods.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is most reliable when evaluating a single project with only cash inflows following the initial cash outflow because this scenario assumes that all cash flows are reinvested at the same rate of return, which is the IRR itself. This allows for a straightforward calculation of the IRR and provides a clear indication of the project's profitability or viability. In contrast, other scenarios such as those described in options A, B, and D may require additional analysis and assumptions to accurately calculate the IRR and interpret its value.

The Internal Rate of Return Is Most Reliable When Evaluating