Internal Rate of Return (IRR) Rule: Two Fatal Flaws

The two fatal flaws of the internal rate of return rule are:

• Arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects.

The IRR rule can be misleading when the discount rate is arbitrarily chosen. It fails to account for the opportunity cost of capital and can lead to inaccurate investment decisions. Additionally, the IRR rule struggles with evaluating mutually exclusive projects (projects where only one can be chosen), as it may favor projects with higher IRR's even if they provide lower net present value (NPV).

Other options are incorrect because they don't fully capture the two major issues with the IRR rule. While initial expenditures and the multiple rate of return problem are important considerations, they are not the most critical flaws associated with the IRR rule.