What Are Some Potential Problems in Using Internal Rate of Return

question 106

Essay

What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?

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Definitions:

Incentive Contracts

Contracts that promise a certain payback as a result of achieving set performance targets, thereby motivating the involved parties to reach specific outcomes.

Monitoring

The continuous or regular observation and recording of activities or processes for the purpose of ensuring compliance with standards or progress toward objectives.

Riskier Investment

An investment option that carries a higher probability of losing money but also the potential for higher returns.

Liability

An obligation that an individual or entity has to another individual or entity, often involving the payment of money.