When a project has multiple internal rates of return (IRRs): the analyst should

Question

When a project has multiple internal rates of return (IRRs): the analyst should choose the highest IRR to compare with the firm's required rate of return (discount rate). the analyst should choose the lowest IRR to compare with the firm's required rate of return (discount rate) the analyst should choose the IRR that seems most "reasonable", given the project's cash flows, to compare with the firm's required rate of return (discount rate) the analyst should compute the project's net present value (NPV) and accept if it is greater than $0.

Explanation / Answer

Answer - Option 4

When a project has multiple IRRs, they are not reliable for decision making. You should then use NPV metric in order to evaluate the project and make choice of whether to go ahead or not with the project.

NPV is an absolute assessment method. If NPV for a project > 0, accept the project as it will add value to shareholders. If NPV < 0, reject he project as it will erode value to shareholders.

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