When a project has multiple internal rates of return, the analyst should ____.
A) choose the highest rate to compare with the firm's cost of capital
B) choose the lowest rate to compare with the firm's cost of capital
C) choose the rate that seems most "reasonable," given the project's cash flows, to compare with the firm's cost of capital
D) compute the project's net present value and accept the project if its NPV is greater than $0

Question

Quizplus · Accepted Answer

When a project has multiple internal rates of return (IRR), it indicates the presence of non-normal cash flows (i.e., cash flow signs change more than once). In such cases, the IRR criterion can be misleading. Therefore, it's more reliable to compute the project's net present value (NPV) and accept the project if its NPV is greater than $0, as NPV provides a direct measure of how much value the project is expected to add to the firm.

When a Project Has Multiple Internal Rates of Return, the Analyst