What are the limitations of the internal rate of return method? Aside from the complexity of calculations, when cash flows are uneven from year to year, there are two important limitations. IRR assumes that cash inflows during the project are reinvested at the same rate that the project earns. Second, sometimes use of the IRR method will cause you to choose incorrectly from two mutually exclusive projects by picking a smaller project with a higher IRR rather than a larger project with a somewhat smaller IRR.

1) IRR assumes that all cash flows are reinvested at the same rate of return generated by the project.

2) The IRR method may mis-rank mutually exclusive projects if they differ greatly in size.

3) The method can produce multiple solutions for the IRR.

4) If the cash flows are unequal, calculating an IRR is best left to the IRR function in a spreadsheet like Excel.

Choose the correct answer:

a. All four a potential rasons

b. 2,3, and 4 but not 1

c 1 only

d. 1 and 2 only