Which of the following is true? IRR is the only measure that investors focus on when analysing the returns of a deal. IRR is only impacted by the timing of cash flows, and so is not a good measure of profitability. It is always true that the higher the risk of an investment, the higher the IRR that investment will achieve. IRR is one of a collection of measures that investors focus on, including profit and equity multiple (and other factors depending on the asset class).

Which of the following is true? IRR is the only measure that investors focus on when analysing the returns of a deal. IRR is only impacted by the timing of cash flows, and so is not a good measure of profitability. It is always true that the higher the risk of an investment, the higher the IRR that investment will achieve. IRR is one of a collection of measures that investors focus on, including profit and equity multiple (and other factors depending on the asset class).

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

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Explain what is meant by the internal rate of return of an investment and discuss its relationship to the NPV of an investment. Explain the problems posed for the use of the IRR when it is necessary (i) to choose between two investments and when (ii) investments are characterised by negative net cash flows at the end of their lives. Discuss and evaluate the use of the payback period as an investment criterion.
When comparing NPV and IRR, which is incorrect? With NPV, the discount rate can be adjusted to take into account increased risk and the uncertainty of cash flows With IRR, cash flows can be adjusted to account for risk NPV can be used to compare investments of various size or magnitude Both NPV and IRR can be used for screening decisions
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