Question

When choosing among mutually exclusive projects, the IRR method

Group of answer choices

a. tends to favor large projects over small projects

b. tends to favor projects that have large cash inflow in their terminal year.

c. tends to agree with the Profitability Index method in choosing among mutually exclusive projects that have different scales.

d. All of the above statements are correct.

e. Only b and c are correct.

Answer 1

^{Let us understand what is IRR(Internal Rate of Return)?}

^{Internal rate of return is an investment proposal which the discount rate that equates the present value of the expected net cash flows with the initial cashflow.}

^{Mutually Exclusive Projects are when the selection of one stop selection of others. Example, in case a company owns a land which can be put to use for two different projects that is A or B then such projects are mutually exclusive to each other that is selecting of one project necessarily the rejection of the other.}

^{Option e that is b and c are correct.}

^{Reason: Tend to favour projects that have large cash inflow in their terminal year.}

^{When IRR > K Accepted, so projects which have large cash inflows can accepted always companies will prefer more return or equal to. When IRR < K rejected.}

^{Tends to agree with the profitability index method in choosing among mutually exclusive projects that have different scales. The project is accepted when the project have different scales of analyses and having more profitability in term of return.}

^{Option a: Tends to favor large projects over small projects. This statement will not affect to mutually exclusive projects. Either 2 or 3 projects will be prefered each have equal evaluation and capital budgeting only time period of return will be differ. While selecting project one will consider small duaration project with high return than large roject.}

^{Option d: All statements are not correct a is incorrect and b, c are correct statements.}