Question

select one disadvantage of irr as a capital budget method. it is only useful with projects that have negative cash flows. it can obscure the planning of mutually exclusive projects if one project has a higher irr and another has a higher npv. projects of similar durations are not easily compared using irr. it involves complex calculations that are not always reliable.

Explanation:

• Analyze each option:
• First option: IRR is useful for projects with normal (positive and negative) cash flows, not only negative. Eliminate.
• Second option: For mutually exclusive projects, IRR can conflict with NPV (a project with higher IRR may have lower NPV), obscuring the optimal choice. This is a known disadvantage.
• Third option: IRR is good for comparing projects of similar duration (or different, but NPV is better for some cases). The statement is false. Eliminate.
• Fourth option: IRR calculations (solving for rate in NPV = 0) can be complex, but modern tools make it manageable, and it's reliable when cash flows are normal. The "not always reliable" claim is inaccurate. Eliminate.

Answer:

B. It can obscure the planning of mutually exclusive projects if one project has a higher IRR and another has a higher NPV.