Multiple Internal Rates of Return Can Occur When There Is

question 12

Multiple Choice

Multiple internal rates of return can occur when there is (are) :

• A) large abandonment costs at the end of a project's life
• B) a major shutdown and rebuilding of a facility sometime during its life
• C) more than one sign change in the pattern of cash flows over a project's life.
• D) all of the above are correct

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Definitions:

Internal Rate of Return (IRR)

A method of calculating an investment's rate of return that makes the net present value of all cash flows equal to zero.

Mutually Exclusive Investments

Mutually exclusive investments are investment options where the choice of one alternative precludes the selection of another, requiring a careful comparison to choose the best option.

Capital Rationing

Occurs when investors or management place a constraint on the size of the firm’s capital budget during a particular period.

Accounting Rate of Return

A financial ratio that measures the profitability of an investment by dividing the average annual profit by the initial investment cost.