Question: One potential criticism of the internal rate of return technique
One potential criticism of the internal rate of return technique is that there is an implicit assumption that this technique assumes the intermediate cash flows of the project are reinvested at the internal rate of return. In other words, if you calculate the future value of the intermediate cash flows to the end of the project at the required return, sum the future values, and calculate the internal rate of return of the two cash flows, you will get the same internal rate of return as the original calculation. If the reinvestment rate used to calculate the future value is different than the internal rate of return, the internal rate of return calculated for the two cash flows will be different. How would you evaluate this criticism?
Answer to relevant QuestionsDefine each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. a. Payback period b. ...Suppose the following two independent investment opportunities are available to Scott, Inc. The appropriate discount rate is 10 percent. a. Compute the profitability indexes for each of the two projects. b. Which project(s) ...Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for AZ-Motorcars is 10 percent. a. Based on the payback period, which project should be taken? b. Based on the ...Darin Clay, the CFO of MakeMoney.com , has to decide between the following two projects: The expected rate of return for either of the two projects is 12 percent. What is the range of initial investment ( Io ) for which ...You are evaluating two different silicon wafer milling machines. The Techron I costs $450,000, has a three-year life, and has pretax operating costs of $85,000 per year. The Techron II costs $580,000, has a five-year life, ...
Post your question