Finance theory suggests that the IRR criterion is the most favorable capital budgeting decision tool.

Question

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Finance theory does not suggest that the Internal Rate of Return (IRR) criterion is the most favorable capital budgeting decision tool in all cases. While IRR is widely used and valuable for evaluating the profitability of potential investments, it has limitations and drawbacks, such as its assumption of reinvestment at the IRR rate and potential multiple IRR issues for non-conventional cash flows. Other tools like Net Present Value (NPV) are often considered superior in many respects because they do not have these limitations and directly measure the value added to the firm.

Finance Theory Suggests That the IRR Criterion Is the Most