Consider the following scenario:
You have just inherited a small island in the Bahamas. The island is near a favourite fishing location, and you are considering two alternative investments.
You cannot undertake both businesses on the island (they are mutually exclusive), and since both rely on tourists, you believe that the riskiness of each venture is identical (you may assume this to be the case and that the associated required return is 20%).
A quick calculation shows that the IRR of the first alternative is 100% and that the IRR of the second alternative is 40%. Hence, according to the IRR criterion, the first option is preferable.
For your Initial Response, in approximately 750 – 1,000 words, address the following: