Discussion
An analyst recommends the alternative with the highest internal rate of return among four mutually exclusive options. The recommendation is
Answer: A
Correct answer: unreliable, scale not having been considered
Ranking mutually exclusive alternatives by internal rate of return is the classic error. A small project with a high percentage return can be beaten outright by a larger one with a lower percentage, since the extra capital in the larger project may still be earning above the required rate. The recommendation needs redoing incrementally.
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