The internal rate of return method of analysis should not be used for comparing two mutually exclusive projects of similar size.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) method of analysis is not appropriate for comparing mutually exclusive projects of similar size because it does not take into account the time value of money. The IRR is the discount rate that makes the net present value (NPV) of a project equal to zero. However, the NPV of a project is not a reliable measure of its profitability because it does not take into account the time value of money. The time value of money is the concept that money today is worth more than money in the future because it can be invested and earn interest. Therefore, the IRR can be misleading when comparing projects of different sizes because it does not take into account the time value of money.

The Internal Rate of Return Method of Analysis Should Not