A Weakness of the Internal Rate of Return Method for Screening

question 109

Multiple Choice

A weakness of the internal rate of return method for screening investment projects is that it:

• A) does not consider the time value of money.
• B) implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate.
• C) implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.
• D) does not take into account all of the cash flows from a project.

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Definitions:

Resource

Anything, such as land, labor, and capital, that can be used to produce something else; includes natural resources (from the physical environment) and human resources (labor, skill, intelligence).

Circular-Flow Diagram

A visual model that depicts how goods, services, and money move through an economy, illustrating the interactions between households and firms.

Sector

A distinct subset of a market, economy, or field of operation, often categorized by similar characteristics or types of economic activity.

Services

Intangible activities or benefits that are typically provided to satisfy the needs or wants of consumers or businesses.