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.

---

Definitions:

Constant Returns to Scale

A situation where increasing all inputs by the same proportion results in output increasing by that same proportion, indicating linear scalability of production processes.

Economies of Scale

Refers to the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Economies of Scale

Cost advantages reaped by companies when production becomes efficient, leading to a decrease in the per-unit cost as output increases.