Which of the following is NOT TRUE about the Internal Rate of Return decision me

Question

Which of the following is NOT TRUE about the Internal Rate of Return decision methodology?

a. May result in multiple rate if cash flows are unconventional

b. Closely related to NPV, often leading to identical decisions

c. Easy to understand and communicate

d. When in conflict with NPV, usually leads to better decision .

a. ALLOWS for determining the ONE TRUE Internal Rate of Return (IRR) when sign changes in Cash Flows are properly considered b. PROJECTS the number of NPVs a project has when sign changes in Cash Flows are considered. c. Determines the MINIMUM number of IRRs a project can have when there are MORE THAN ONE sign change in a stream of capital budgeting project Cash Flows d. Determines the MAXIMUM number of IRRs a project can have when there are MORE THAN ONE sign change in a stream of capital budgeting project Cash Flows
You are considering a $50,000 project and feel that a 12 percent rate of return is reasonable given the nature of the risk involved. The project will generate Cash Flows of $8,000 in Year 1, $19,800 in Year 2, $43,000 in Year 3, and $7,000 in Year 4. What is the Net Present Value (NPV) of the project?
a.$3,673.12 b.$7,982.47 c.$620.11
d.$2,284.60

Explanation / Answer

1)d. When in conflict with NPV, usually leads to better decision ; 2)2) d.Determines the MAXIMUM number of IRRs a project can have when there are MORE THAN ONE sign change in a stream of capital budgeting project Cash Flows; 3) -50000 +8000/1.12 + 19800/1.12^2 +43000/1.12^3 +7000/1.12^4 = 7982.47 ; so ans is b.$7,982.47

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