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a. What are the redeeming qualities and shortcomings of the internal rate of return (IRR) method...

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Finance

a. What are the redeeming qualities and shortcomings of theinternal rate of return (IRR) method in capital budgeting analysis?explain

b.Explain conceptually in detail what the weighted average costof capital (WACC) is and the role it plays in capitalbudgeting.

c. Explain why the opportunity cost and net working capital(NWC) are included, while the financing costs and sunk costs areNOT in the cash flow analysis.

Answer & Explanation Solved by verified expert
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Answer a The internal rate of return IRR is one of a capital budgeting technique where a particular discount rate equalizes the present value of cash flows with capital outlay Therefore in most of the incidents it is found that discount rate in IRR is greater than normal cost of capital Therefore when a firm requires greater cost of capital rate than the normal of cost of capital it chooses IRR method However there exists some shortcomings in the IRR method In case of non conventional cash flows the IRR fails to provide perfect result of a project Non conventional project refers several outflows of cash in different period in such a circumstances it is observed the result found under IRR defies managerial prudence In case of mutually exclusive project generally net present value method is more choice able than the IRR method as NPV is driven on chosen discount rate which is more realistic in    See Answer
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a. What are the redeeming qualities and shortcomings of theinternal rate of return (IRR) method in capital budgeting analysis?explainb.Explain conceptually in detail what the weighted average costof capital (WACC) is and the role it plays in capitalbudgeting.c. Explain why the opportunity cost and net working capital(NWC) are included, while the financing costs and sunk costs areNOT in the cash flow analysis.

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