Final answer:
The IRR rule can lead to bad decisions when i) projects have negative NPVs, ii) comparable cash flows in size and timing, or iii) non-conventional cash flows. Relying solely on IRR in these scenarios may result in inaccurate investment decisions.
Step-by-step explanation:
The irr rule can lead to bad decisions when projects have negative npvs or projects have comparable cash flows in size and timing or project cash flows are non-conventional or projects are mutually exclusive.
When projects have negative NPVs, it means that the project's cash outflows exceed the present value of its cash inflows. This indicates that the project is not generating sufficient returns to cover its costs and is not financially viable.
Similarly, when projects have comparable cash flows in size and timing, it becomes difficult to determine which project offers better investment opportunities. In such cases, relying solely on the internal rate of return (IRR) may lead to bad decisions as it does not consider the absolute value or timing of each project's cash flows.
Lastly, non-conventional cash flows refer to projects that have unconventional or irregular cash flow patterns, such as multiple sign changes or non-periodic cash flows. The IRR rule assumes a one-directional cash flow pattern, making it less reliable for evaluating projects with non-conventional cash flows.