- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 2. Capital Allocation
CFA Practice Question
Which of the following is NOT a disadvantage of the IRR method?
A. It measures the expected rate of return from a project.
B. It is more difficult to compute than NPV.
C. It is affected by the scale and timing of project cash flows.
Explanation: The IRR measures the expected rate of return when expected cash flows are used for its calculation. This is not a disadvantage of the IRR method.
User Contributed Comments 8
| User | Comment |
|---|---|
| Gigem | I'm confused. How is the IRR being "affected by the scale and timing of project cash flows" a disadvantage of the IRR method? |
| lockedin | question says NOT a disadvantage. |
| steved333 | C is a disadvantage because the computation of IRR is estimated, though the actual timing and scale of cash flows can prove that estimate to be wrong. |
| kellyyang | I also got confused by answer C!! |
| bmesfin | Consider a project with multiple IRRs due to unconventional cash flows. That would render C a disadvantage. |
| kritan | it is highly arguable that IRR is more difficult to compute than NPV. On your fingers maybe, but on any calculator or Excel sheet it's child's play. |
| ascruggs92 | IRR can't be calculated manually, you need a calculator to do it, whereas NPV can be manually calculated. From that standpoint, IRR is harder to calculate. |
| heshamessa | answer c is confusing , becasue project scale is one of the advantage of IRR, NOT disadvantage |