A major limitation of the internal rate of return method is:
A) Failure to measure time value of money.
B) Failure to measure results as a percent.
C) Failure to consider the payback period.
D) Failure to reflect varying risk levels over project life.
E) Failure to compare dissimilar projects.

Question

Quizplus · Accepted Answer

The major limitation of the internal rate of return (IRR) method is its failure to reflect varying risk levels over project life. The IRR assumes that the cash flows from a project will be reinvested at the same rate as the IRR, which may not be a realistic assumption. This can lead to inaccurate estimates of the project's true return. The failure to consider risk can be particularly important in situations in which cash flows are uncertain or where the project has a long life.

A Major Limitation of the Internal Rate of Return Method