The internal rate of return is unreliable as an indicator of whether or not an investment...

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? Multiple Choice

a.One of the time periods within the investment period has a cash flow equal to zero.

b.The initial cash flow is negative.

c.The investment has cash inflows that occur after the required payback period.

d.The investment is mutually exclusive with another investment of a different size.

e.The cash flows are conventional.

Expert Solution

The correct answer is -

d.The investment is mutually exclusive with another investment of a different size.

Mutually exclusive projects means the firm has to make a decision to select one project and reject another. In Mutually exclusive projects acceptance of one means rejection of other.

In case of mutually exclusive projects with different size of two projects, IRR may give unrealistic or conflicting decisions as IRR will prefer the project which are smaller in size which may not be providing more absolute returns.

In other options IRR will give realistic decisions as-

IRR of a proposal is defined as the discount rate at which NPV is 0. It is the rate at which the present value of cash inflows is equal to present value of cash outflows. It is usually the rate of return the project earns.

--> IRR provides realistic results when the cashflows are conventional (in same series - one negative cashflow and series of positive cashflow).

--> Initial cashflow is negative in case of conventional cashflows.

--> There is no problem with One of the time periods within the investment period has a cash flow equal to zero and if The investment has cash inflows that occur after the required payback period.

Hope it helps!

jeff jeffy answered 2 years ago

Find Internal rate of return of the investment opportunity

Royal Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $16,200,000; it will enable the company to increase its annual cash inflow by $5,000,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $32,400,000; it will enable the company to increase annual cash flow by $7,500,000 per year. This...

If an investment is producing an internal rate of return that is equal to the required...

If an investment is producing an internal rate of return that is equal to the required return, the Net Present Value of the project will be ______ and the Profitability Index of the project will be ______.

The internal rate of return for an investment with contributions of $3,000 at time 0 and...

The internal rate of return for an investment with contributions of $3,000 at time 0 and $1,000 at time 1 and returns of $2,000 at time 1 and $4,000 at time 2 can be expressed as 1/ n . Find n.

The internal rate of return represents the rate of interest that recovers the initial investment outlay....

The internal rate of return represents the rate of interest that recovers the initial investment outlay. Discuss the validity of this statement. paragraph answer:

Critique Internal Rate of Return and compare to Return on Assets, Investment, Capital, and defend best...

Critique Internal Rate of Return and compare to Return on Assets, Investment, Capital, and defend best practice in assessing overall financial performance.

a-Define Internal rate of return and state whether it is a dollar amount of a percentage...

a-Define Internal rate of return and state whether it is a dollar amount of a percentage rate? b- what is capital recovery cost? c- you wish to endow a scholarship for student to receive 10,000 each year. The program will last for a very long time. you expect to generate an average intrest rate of 12% per year. Ignoring administrative expenses what is the governing equation to analyze this situation? what amount must you deposit at t=0 to fund such...

What is the internal rate of return (IRR) on an investment with the following cash flows?...

What is the internal rate of return (IRR) on an investment with the following cash flows? Holding period 5 years. Round your answer to nearest 0.25%. Please show work (NO EXCEL) Year Net Income Purchase Price $4,000,000 1 $250,000 2 $300,000 3 $350,000 4 $400,000 5 $450,000 Resale $4,750,000 (net of costs)

Internal rate of return and net present value are related in that: Internal rate of return...

Internal rate of return and net present value are related in that: Internal rate of return formed the basis for the eventual development of the net present value theory. Internal rate of return finds a discount rate that produces a net present value of zero. Net present value formed the basis for the eventual development of the internal rate of return theory. Net present value can only be used to evaluate irregular cash flows, whereas internal rate of return can...

Discuss the differences between return on investment captial method (RIC) and modified internal rate of return...

Discuss the differences between return on investment captial method (RIC) and modified internal rate of return (MIRR) method? In addition, list other methods for project analyze with various rate options for economic analysis studies.

Calculate the Internal Rate of Return of each of the following potential investments and recommend whether...

Calculate the Internal Rate of Return of each of the following potential investments and recommend whether or not to include them in the upcoming capital budget given that the firm’s cost of capital is 14.5%. New Software: Initial Cost $25,000 Training Cost $12,000 Annual Cost Savings $10,500 Useful Life 6 Years Machine A or Machine B Note: The key word here is “or”. One or the other machine must be bought. So, the analysis should be based on the incremental...

Question