Question

Which of the following statements relating to the internal rate of return (IRR) is correct?

Question 24 options:

	1) If the IRR exceeds the required rate of return, the payback period is below the cutoff point.
	2) When the IRR is less than the required return, the NPV is positive.
	3) If two projects are mutually exclusive, you should select the project with the highest IRR
	4) A project may have multiple IRRs if the project’s cash flows are unconventional.

Answer 1

The answer for the question is option 4                                     
A project may have multiple IRRs if the project’s cash flows are unconventional is correct

Expiation

A conventional cash flow starts with a negative cash flow and after that it follows a successive periods of positive cash flows. A single IRR can be calculated from a conventional type of projects and in order to check the attractiveness of the project the IRR can be compared to a hurdle rate. But if a project subject to another negative cash flows after the positive cash flows(which means the project has unconventional cash flows) in future there will be two IRRs which cause decision of uncertainty for decision maker. For example if the IRRs of unconventional project are 7% and 18% and the hurdle rate is 12% management will not have the confidence to go further with the project investment