Potential problems in using the IRR as a capital budgeting technique include:

Question

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A) The timing problem occurs when cash flows are not received or generated in a uniform pattern. This can lead to IRR calculations that are inaccurate or uncertain.

B) Multiple IRRs can occur when a project has non-conventional cash flows, which can result in more than one discount rate that makes the net present value (NPV) of the project equal to zero. This creates ambiguity in determining the IRR.

C) The scale problem refers to the issue of using IRR to compare projects of different sizes, which can lead to incorrect comparisons due to different cash flow magnitudes.

All of these potential problems highlight the limitations of using IRR as a capital budgeting technique and suggest that a more comprehensive analysis, such as the use of NPV, may be necessary.

Potential Problems in Using the IRR as a Capital Budgeting