Which of the following is a primary reason why the Internal Rate of Return (IRR) method continues to be used in investment decision-making practice?

• A. It provides a single percentage rate that is easy to compare with required rates of return.
• B. It always gives the same investment ranking as Net Present Value (NPV) for mutually exclusive projects.
• C. It is unaffected by the timing of cash flows.
• D. It does not require any assumptions about the reinvestment of cash flows.

Answer: (A)

Verified step by step guidance

1. Understand the concept of Internal Rate of Return (IRR): IRR is the discount rate at which the net present value (NPV) of all cash flows from a project equals zero. It is widely used in investment decision-making to evaluate the profitability of potential investments.
2. Analyze the primary reason for IRR's popularity: IRR provides a single percentage rate that is easy to interpret and compare with the required rate of return or hurdle rate. This simplicity makes it appealing for decision-makers.
3. Evaluate the other options provided in the problem: Consider whether IRR always gives the same investment ranking as NPV for mutually exclusive projects (it does not), whether it is unaffected by the timing of cash flows (it is affected), and whether it requires assumptions about reinvestment of cash flows (it does).
4. Focus on the correct answer: The primary reason IRR is used is its ability to provide a single percentage rate that is easy to compare with required rates of return, making it a straightforward tool for decision-making.
5. Conclude the reasoning: While IRR has limitations, such as potential conflicts with NPV rankings for mutually exclusive projects, its simplicity and ease of comparison are the main reasons for its continued use in practice.