Sir i made one mistake here. and dont understand why:
"Which of the following statements is/are NOT a weakness of the IRR in appraising investments?"
1)It ignores the time value of money
2)there can be several IRR's for the same investment
3)It is dependent on the cost of capital for the company
4)it cannot reliably be used as a basis for choosing between investments
So, i thought that it's 1)+3)+4) because:
1)it ignores time value of money - false, it takes account of it. so its not a weakness
2)there can be several IRR's - not sure of several but 2 can be. so it seems to be true
3)Its dependent on cost of capital - cost of capital has no effect on IRR
4)its reliable basis for appraising - it can compare "the Margins for Error" so can be basis for comparing.
so the only one that is weakness actually is 2)there can be several IRR's
Please advice whats wrong with my comprehending of the Question.
Regards
Rustam
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9y ago#1It is not a reliable basis for comparing which of two investments is the better.
The best investment is the one with the highest NPV and that one will not always have the highest IRR. (Certainly margins for error are of interest, but that is not the main basis for choosing one investment over an other)
so the question then should say What ARE the weaknesses? right?
9y ago#3The correct answer is (1) and (3) because they are not weaknesses of the IRR.
( (2) and (4) are weaknesses )
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