Which of the following statements is CORRECT?

A. For a project to have more than one IRR, then both IRRs must be greater than the WACC
B. If two projects are mutually exclusive, then they are likely to have multiple IRRs
C. If a project is independent, then it cannot have multiple IRRs
D. Multiple IRRs can only occur if the signs of the cash flows change more than once
E. If a project has two IRRs, then the one that is closest to the vertical axis is the one that should be accepted and relied upon.

A project cannot have multiple IRRs if it is independent. Multiple IRRs can only occur if the signs of the cash flow change more than once. For a project to have more than one IRR, then both IRRs must be greater than WACC. If a project's NPV is greater than zero, then it's IRR must be less than zero.

Multiple IRRs occur when a project has more than one internal rate of return. The problem arises where a project has non-normal cash flow (non-conventional cash flow pattern).

Internal rate of return (IRR) is one of the most commonly used capital budgeting tools.

jayilych4real jayilych4real · Answer 2 · 2021-11-23T12:24:37+01:00

The statement which is CORRECT about the given options is:

D. Multiple IRRs can only occur if the signs of the cash flows change more than once

According to the given question, we are asked to show the statement which is CORRECT about a cash budgeting tool

As a result of this, we can see that an Internal rate of return (IRR) is a capital budgeting tool which is used to calculate the returns and possible spend which can be made.

With this in mind, we can see that a project cannot have multiple IRRs if it is independent, which goes without saying that the other options are incorrect and option D is correct

Therefore, the correct answer is option D