A significant disadvantage of the internal rate of return isthat it: a. Does not

Question

A significant disadvantage of the internal rate of return isthat it:
a. Does not fully consider the time value of money. b. It does not give proper weight to all cash flows. c. Can result in multiple rates of return (more than oneIRR). d. All of the above. A significant disadvantage of the internal rate of return isthat it:
a. Does not fully consider the time value of money. b. It does not give proper weight to all cash flows. c. Can result in multiple rates of return (more than oneIRR). d. All of the above.

Explanation / Answer

c. Can result in multiple rates of return (more thanone IRR). A problem with the IRR method is that the IRRmethod may give rise to different rates of return. Assumea situation where there are 2 discount rates (i.e. 2 IRRs) thatmake the present value of an investment equal to the initialinvestment. In this case, a financial analyst would struggle tochoose between the 2 rates as a decision factor for comparison withthe cutoff rate

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