The Two Fatal Flaws of the Internal Rate of Return

question 102

Multiple Choice

The two fatal flaws of the internal rate of return rule are:

• A) arbitrary determination of a discount rate and failure to consider initial expenditures.
• B) arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects.
• C) arbitrary determination of a discount rate and the multiple rate of return problem.
• D) failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects.
• E) failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem.

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Definitions:

World Prices

The prices of goods and services determined in the global market that influence the cost and availability of products internationally.

Aggregate Demand

The total amount of goods and services demanded in an economy at a given overall price level and time.

Aggregate Supply

The total quantity of goods and services that producers in an economy are willing and able to supply at different price levels.

Rational Expectations

An economic theory that suggests individuals make decisions based on their best forecasts using all available information.