Why Is the Internal Rate of Return (IRR)inadequate When Comparing

question 40

Essay

Why is the internal rate of return (IRR)inadequate when comparing mutually exclusive investments with different timing of the cash flows?

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Definitions:

Year-End Price

The final market price of a security or an asset on the last trading day of the fiscal year.

Price Index

A statistical measure that examines the weighted average of prices of a basket of consumer goods and services, indicating cost of living changes over time.

Realized Holding Gains

Profits made from the sale of an investment that has increased in value over the time it was held.

FIFO Valuation

A method of inventory valuation where the first items placed in inventory are the first ones sold, standing for First In, First Out.