The internal rate of return is:
A)more reliable than net present value whenever you are considering mutually exclusive projects.
B)equivalent to the discount rate that makes the net present value equal to 1.0.
C)computed using a project's cash flows as the only source of inputs.
D)dependent on the interest rates offered in the marketplace.
E)a better methodology than net present value when dealing with unconventional cash flows.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is computed using a project's cash flows as the only source of inputs. It is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero, not 1.0. It does not directly depend on the interest rates offered in the marketplace, although these rates can influence the decision criteria (e.g., whether the IRR exceeds the cost of capital). The IRR is not necessarily more reliable than NPV for mutually exclusive projects because it can lead to misleading conclusions, especially when comparing projects of different sizes or durations. Additionally, NPV is generally considered a more reliable method than IRR when dealing with unconventional cash flows, which can result in multiple IRRs or no IRR at all.

The Internal Rate of Return Is