True or False: A higher Internal Rate of Return (IRR) always indicates that a project is more profitable in absolute terms compared to projects with lower IRRs.
False
True
The correct answer is False. While a higher IRR can indicate a potentially more attractive investment, it does not always mean that a project is more profitable in absolute terms. IRR is a relative measure of a project's return on investment, expressed as a percentage. It doesn't account for the scale of the project or the absolute amount of money earned.
For example:
Although Project A has a higher IRR, Project B might generate more total profit due to its larger scale. Additionally, IRR has other limitations:
Project managers should use IRR in conjunction with other financial metrics like Net Present Value (NPV) and consider non-financial factors for a comprehensive project evaluation.
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