24.2
Consider the following two projects:
| Year 0 | Year 1 | Year 2 | Year 3 | |
| A | -5000 | 2500 | 2500 | 2500 |
| B | -2000 | 1000 | -500 | 3000 |
2. Fully explain all of the reasons that you
might be reluctant to use IRR analysis to choose between these
two projects. (2 pts)
The first reason you would be reluctant is the "size
disparity problem." Since A&B have different initial
investments, using a rate of return (such as IRR) might not lead
you to choose the one that adds the most value ($). Project B has
a negative cash flow in year 2 and thus has more than one sign
change. This causes problems for IRR analysis in that the project's
IRR is no longer unique. You would be concerned about using an
IRR figure for B because it may not be the correct one to use.
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