The Reason Why the IRR Criterion Can Give Conflicting Signals

question 102

Multiple Choice

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:

• A) the NPVs of these projects cross over at some discount rate.
• B) discounted cash flow is not considered with mutually exclusive projects.
• C) IRR performs better with accounting returns than with cash flows.
• D)mutually exclusive projects have multiple IRRs

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Definitions:

CAPM (Capital Asset Pricing Model)

A financial model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Market Risk

The risk of losses in investments caused by factors that affect the entire market, such as economic recession or political instability.

Treasury Bonds

Long-term government bonds issued by the Treasury Department with maturity periods typically longer than 10 years.

Beta Coefficient

The beta coefficient measures the volatility of a stock or portfolio in comparison to the market as a whole, indicating its relative risk.