While Net Present Value (NPV) and Internal Rate of Return

question 1

Multiple Choice

While net present value (NPV) and internal rate of return (IRR) analysis both may be used as investment decision criteria, there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations. All of the following are limitations of the IRR method EXCEPT:

• A) IRR calculations assume that cash flows are reinvested at the IRR, rather than at the actual rate that investors expected to earn on reinvested cash flows.
• B) With the IRR decision criterion multiple solutions may exist for investments where the sign of the cash flows changes more than once over the expected holding period.
• C) The IRR methodology cannot be used to make comparisons across different investment opportunities.
• D) The use of IRR as a decision criterion will not necessarily result in wealth maximization for the investor.

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