Which of the following are merit of IRR method of Capital Budgeting? IRR method recognised time value…
The Internal Rate of Return (IRR) method of capital budgeting recognizes the time value of money (A), uses the acceptance rule r > k where r is the internal rate of return…
Choose your answer
Which of the following are merit of IRR method of Capital Budgeting?
- IRR method recognised time value of money
- Acceptance rule r > k
- It considers all cash flows occuring over the entire life of the project to calculate its rate of return
- IRR method is good choice for mutually exclusive project.
- Value additivity principle implies in IRR method.
Answer and explanation
Correct answer C
The Internal Rate of Return (IRR) method of capital budgeting recognizes the time value of money (A), uses the acceptance rule r > k where r is the internal rate of return and k is the cost of capital (B), and considers all cash flows occurring over the entire life of the project (C). However, IRR can give conflicting rankings for mutually exclusive projects due to reinvestment rate assumptions (D is false) and does not obey the value additivity principle (E is false). Thus, A, B, C only is correct.
Practice for these exams
-
UGC NET Management