Question

Which of the following statements is (are) true concerning the internal rate of return (IRR)?

I. The IRR is the most widely used capital budgeting technique.
II. The IRR method can produce multiple rates of return if the cash flows are nonconventional.
III. If the IRR rate is used as the discount rate, then the resulting profitability index must equal 1.0.
IV. The crossover point occurs where the IRR of two projects are equal.
A) II only
B) II and III only
C) II and IV only
D) I, II, and III only
E) I, II, and IV only

Answer 1

The correct statements concerning IRR are that it can produce multiple rates of return with nonconventional cash flows and if it is used as the discount rate, the profitability index must be 1.0. Option B (II and III only) is the right choice.

Step-by-step explanation:

The question pertains to the concept of the Internal Rate of Return (IRR), which is a tool used in capital budgeting to evaluate the profitability of potential investments. The correct statements about IRR are:

• Statement II: The IRR method can produce multiple rates of return if the cash flows are nonconventional.
• Statement III: If the IRR rate is used as the discount rate, then the resulting profitability index must equal 1.0.
• Statement IV: The crossover point occurs where the IRR of two projects are equal, but is not a definitive aspect of the IRR itself and relates to comparing different projects.

Therefore, the correct answer from the options provided is B) II and III only.

While IRR is a common tool, stating unequivocally that it is the most widely used might not always hold, as other methods like Net Present Value (NPV) are also very popular. Hence, Statement I is not definitively true and can be debated.