Question

Which of the following statements related to the internal rate of return (IRR) are correct?

I. The IRR method of analysis can be adapted to handle non-conventional cash flows.
II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate.
III. The IRR tends to be used more than net present value simply because its results are easier to comprehend.
IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

		I and II only
		III and IV only
		I, II, and III only
		II, III, and IV only
		I, II, III, and IV

Answer 1

IRR is a Internal rate of return , where the Present value of Inflow is equal to Present value of Outflow which means the Net Present Value is Zero

A Non conventional cash flow pattern generally has initial outflow followed by Inflows and outflows. IRR method of capital budgeting can be used in case of Non conventional cash flow. Cross over rate is the rate at which the present value of cash flow of two different project would be zero. IRR method is more preferred then NPV method as it easy to use and the conclusion to make investment decision is easy. The timing and amount of cash flow would impact IRR as IRR is calculated based on year in which cash flow is received and the value of cash flow collected.

Thus, all the statement provided above are true I, II, III, and IV