hard · CFA Level I corp
Amberfen Pharma is evaluating a research project with an initial outlay of 100 million. The project has a 4-year life. Depreciation is straight-line to zero over 4 years. The project is expected to generate annual revenues of $80 million and cash expenses of $30 million. The cost of capital is 12% and the tax rate is 25%.
If Amberfen Pharma uses the Internal Rate of Return (IRR) as its primary decision tool, which of the following is the most significant risk when comparing this project to a mutually exclusive project with a much larger scale?
- The IRR cannot be calculated if the project has only one sign change.
- The IRR assumes that cash flows are reinvested at the cost of capital.
- The IRR ignores the absolute dollar value added to the firm.
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