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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Which of the following is not true regarding the IRR?

  1. a. The IRR is the interest rate that sets the present value of a project’s cash inflows equal to the present value of the project’s cost.
  2. b. The IRR is the interest rate that sets the NPV equal to zero.
  3. c. The popularity of IRR may be attributable to the fact that it is a rate of return, a concept that is comfortably used by managers.
  4. d. If the IRR is greater than the required rate of return, then the project is acceptable.
  5. e. The IRR is the most reliable of the capital budgeting methods.

To determine

Identify the statement which is not true with respect to IRR.

Explanation

Internal Rate of Return:

An interest rate at which the present value of an investment’s cash inflows is equal to the present value cost of the investment is known as internal rate of return. The value of NPV is zero in case of an internal rate of return.

e.

NPV method is most reliable of the capital budgeting method. Therefore, option e is the correct answer.

a.

The statement is true because IRR is an interest rate at which the present value of a project inflow and outflow is equal...

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