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In: Finance
What are the Problems associated with Internal Rate of Return ("IRR") analysis? Why do people use...
What are the Problems associated with Internal Rate of Return ("IRR") analysis? Why do people use this, then?
Solutions
Expert Solution
Problems related to internal rate of return are as follows-
A. internal rate of return will not be properly applied when there would be more than one negative cash flow related to a particular project.
B. It will often provide with multiple internal rate of return when we will be calculating it in consideration with uneven cash flows
C. Internal rate of return can also not be applied in case of mutually exclusive projects with unequal lives because it will not be giving with the appropriate result.
we are using internal rate of return because internal rate of return is directly comparable method as it will provide an internal rate of return which will be directly comparable to the hurdle rate in order to accept the project or not.it is also a simple method and it is also used as a complementary method to the net present value and it will be preferred when there would be a capital rationing present in capital allocation.
jeff jeffy answered 1 year agoRelated Solutions
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The internal rate of return (IRR) refers to the compound annual rate of return that a...
The internal rate of return (IRR) refers to the compound annual
rate of return that a project generates based on its up-front cost
and subsequent cash flows. Consider this case:
Blue Llama Mining Company is evaluating a proposed capital
budgeting project (project Delta) that will require an initial
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rate of return that a project generates based on its up-front cost
and subsequent cash flows. Consider this case:
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budgeting project (project Delta) that will require an initial
investment of $1,450,000.
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