Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

A limitation of the internal rate of return (IRR) method is that it:

Requires knowledge of the project's payback period

Cannot be used to evaluate mutually exclusive projects

Assumes that interim cash flows are reinvested at the IRR rate

Ignores the time value of money

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Verified step by step guidance

Understand the concept of Internal Rate of Return (IRR): IRR is the discount rate at which the net present value (NPV) of a project becomes zero. It is used to evaluate the profitability of investments.

Identify the limitation of IRR: One key limitation is that IRR assumes that all interim cash flows generated by the project are reinvested at the IRR rate, which may not be realistic in practice.

Clarify why this assumption is problematic: In real-world scenarios, reinvestment rates may differ from the IRR, and this can lead to inaccurate projections of the project's profitability.

Compare IRR with other methods: For example, the NPV method assumes reinvestment at the firm's cost of capital, which is often more realistic. This highlights why IRR's reinvestment assumption can be a limitation.

Conclude the analysis: Recognize that while IRR is a useful tool for evaluating projects, its assumptions about reinvestment rates should be carefully considered, especially when comparing mutually exclusive projects or projects with varying cash flow patterns.