The internal rate of return model does not consistently result in choices that maximize firm wealth.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) model can be flawed in certain situations, leading to decisions that do not maximize firm wealth. One of the main drawbacks is that IRR assumes that all future cash flows can be reinvested at the same rate as the IRR. However, this assumption may not hold true in real-world scenarios, especially when the project investment is large or the market conditions change over time. As a result, the IRR model may miss out on more profitable opportunities and lead to suboptimal choices. Therefore, it is important to consider other criteria such as the net present value (NPV) and profitability index (PI) in addition to IRR when evaluating investment options.

The Internal Rate of Return Model Does Not Consistently Result