CFA Practice Question

There are 233 practice questions for this study session.

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
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