hich of the following is true?IRR cannot be used when the cost of capital is not knownThe IRR rule cannot distinguish between lending and borrowingIRR is difficult to apply when short-term interest rates from long-term interest ratesIRR rule assumes that intermediate cash flows are reinvested at the cost of capital
Question
hich of the following is true?IRR cannot be used when the cost of capital is not knownThe IRR rule cannot distinguish between lending and borrowingIRR is difficult to apply when short-term interest rates from long-term interest ratesIRR rule assumes that intermediate cash flows are reinvested at the cost of capital
Solution
The question asks which of the following statements is true about the Internal Rate of Return (IRR). Let's analyze each statement step by step:
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"IRR cannot be used when the cost of capital is not known": This statement is true. The IRR is a financial metric that calculates the rate of return at which the net present value (NPV) of an investment becomes zero. In order to calculate the IRR, we need to know the cost of capital, which represents the minimum required rate of return for an investment.
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"The IRR rule cannot distinguish between lending and borrowing": This statement is true. The IRR rule is based on the assumption that cash flows generated by an investment are reinvested at the same rate as the IRR itself. Therefore, it does not differentiate between lending (positive cash flows) and borrowing (negative cash flows).
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"IRR is difficult to apply when short-term interest rates differ from long-term interest rates": This statement is true. The IRR calculation assumes that all cash flows occur at regular intervals and are reinvested at the same rate. If short-term interest rates differ significantly from long-term interest rates, it can be challenging to accurately estimate the IRR.
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"IRR rule assumes that intermediate cash flows are reinvested at the cost of capital": This statement is true. The IRR calculation assumes that any cash flows generated by an investment are reinvested at the same rate as the cost of capital. This assumption allows for the calculation of the IRR and the determination of whether an investment is profitable or not.
In conclusion, all of the statements provided are true about the IRR.
Similar Questions
Which of the following statements about the IRR method is/are true? I. IRR considers the time value of money II. If the IRR exceeds the cost of capital, the NPV will be positiveGroup of answer choicesI onlyII onlyI and IINone of the aboveNext
Which of the following statements is FALSE?Group of answer choicesThe IRR investment rule will identify the correct decision in many, but not all, situations.There are situations in which multiple IRRs exist.The IRR is affected by the scale of the investment opportunity.The payback rule is reliable because it considers the time value of money and depends on the cost of capital.
Which of the following statements is FALSE? Question 3Answer A. The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. B. The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. C. There are situations in which multiple IRRs exist. D. Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions.
True or False QuestionTrue or false: The interest rate is a mechanism that perfectly rations capital to its most productive uses.True false question.TrueFalse
Internal Rate of Return (IRR) is defined as the discount rate at which Net Present Value (NPV) of the cash flows is equal to zero.Group of answer choicesTrueFalse
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