Choice "B" is correct. The internal rate of return (IRR) method is less reliable than the net present value (NPV) technique when there are several alternating periods of net cash inflows and net cash outflows or the amounts of cash flows differ significantly. The IRR is strictly a percentage measure of return, while the NPV is an absolute measure. Due to this difference, the timing or amount of cash flows under IRR can be misleading when compared to the NPV method.
Example: | If an investment of $50 earns $100. Then, 100/50 |
| If an investment of $50,000 earns $25,000 then, 25,000/50,000 |
| IRR suggests it is best to invest $50 to earn $100 and a 200% return while the NPV method will favor a larger NPV for the $50,000 investment. |
Choices "c", "a", and "d" are incorrect. These conditions do not make the IRR method less reliable than the NPV method.
