13 Acctg2020,sec 02 (9:00am), Test: Exam V Chs 11& 12 This Question: 1 pt 16 of
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Question
13 Acctg2020,sec 02 (9:00am), Test: Exam V Chs 11& 12 This Question: 1 pt 16 of 25 (0 complete) Which of the following is a weakness of the intemal rate of returm (IRR)? O A. IRR is not a percentage rate, but is expressed in dollars. O B. IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return. O C. IRR assumes that the cash O D. IRR ignores the time value of money inflows from the project are immediately reinvested at the internal rate of returm. Click to select your answer esc 0Explanation / Answer
Answer:-A weakness of Internal rate of return (IRR) is:- IRR assumes that the cash inflows from the projects are immediately reinvested at the internal rate of return. (option C).
Explanation:-
Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.
Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected.
IRR is best-suited for analyzing venture capital and private equity investments, which typically comprises multiple cash investments over the life of the business, and a single cash outflow at the end via IPO or sale.
Disadvantages Of IRR:-
1. IRR method is difficult to understand, complications arises due to trial and error method.
2. The main drawback of IRR is that it recognizes the cash inflows generated by project is reinvested to internal rate of project, but NPV recognizes such cash inflows are reinvested to cost of capital of the company.
3. Single discount rate ignores the varying future interpret rate.
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