In capital budgeting, how many internal rates of return exist for non-normal cash flows____________?
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Answer: B. Multiple
Explanation
Non-normal cash flow patterns with changing signs yield multiple internal rates. Mathematical sign changes create multiple roots in the polynomial equation. Projects with intermittent cash outflows can produce several valid return rates. Internal rate of return sets the net present value of cash flows to zero. Normal cash flows have a single outflow followed by continuous positive inflows. Capital budgeting techniques help firms evaluate long-term investment viability.
Mining and extraction projects often involve cleanup costs causing cash outflows. Financial analysts must use modified internal rate of return for complex projects. Multiple return rates can confuse decision makers evaluating capital expenditure projects. One internal rate exists exclusively for projects with normal cash flows. Accepted is a decision status rather than a mathematical cash flow result. Non-accepted is a rejection designation and not a rate of return property.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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