Question
Which of the following are advantages of IRR?
Multiple select question.
It can be estimated without knowing the discount rate.
It always results in a single answer.
It works well with nonconventional cash flows.
It is easy to understand and communicate.
Multiple select question.
It can be estimated without knowing the discount rate.
It always results in a single answer.
It works well with nonconventional cash flows.
It is easy to understand and communicate.
Answers
GPT-4o mini
The advantages of the Internal Rate of Return (IRR) include:
1. **It can be estimated without knowing the discount rate.** - True. IRR is the rate at which the net present value (NPV) of cash flows is zero, which means you don’t need to know the discount rate upfront to calculate it.
2. **It always results in a single answer.** - False. IRR can result in multiple values (multiple IRRs) when there are nonconventional cash flows (i.e., cash flows that change direction more than once).
3. **It works well with nonconventional cash flows.** - False. While it's commonly used, IRR can be misleading or result in multiple rates when cash flows are nonconventional.
4. **It is easy to understand and communicate.** - True. IRR is expressed as a percentage, making it a familiar and straightforward metric for stakeholders to comprehend.
So, the correct true statements are:
- It can be estimated without knowing the discount rate.
- It is easy to understand and communicate.
1. **It can be estimated without knowing the discount rate.** - True. IRR is the rate at which the net present value (NPV) of cash flows is zero, which means you don’t need to know the discount rate upfront to calculate it.
2. **It always results in a single answer.** - False. IRR can result in multiple values (multiple IRRs) when there are nonconventional cash flows (i.e., cash flows that change direction more than once).
3. **It works well with nonconventional cash flows.** - False. While it's commonly used, IRR can be misleading or result in multiple rates when cash flows are nonconventional.
4. **It is easy to understand and communicate.** - True. IRR is expressed as a percentage, making it a familiar and straightforward metric for stakeholders to comprehend.
So, the correct true statements are:
- It can be estimated without knowing the discount rate.
- It is easy to understand and communicate.