In the context of project ranking, what is the primary issue with using IRR?

The primary issue with using Internal Rate of Return (IRR) in project ranking is that it can lead to incorrect project selection due to misinterpretation. IRR is the discount rate that makes the net present value (NPV) of all cash flows from a project equal to zero. While it is a useful metric, it can sometimes provide misleading results, especially when comparing projects with different durations or scales.

For instance, a project with a high IRR may appear more attractive than a project with a lower IRR, but if the lower IRR project has a significantly larger scale or generates more total cash flow, it may actually be the better choice based on NPV criteria. Additionally, IRR can give multiple values for non-conventional cash flows, leading to confusion and potentially poor decision-making. Therefore, relying solely on IRR without considering these factors can result in selecting projects that do not maximize shareholder value.

In comparison, other issues mentioned in the options have their own limitations but do not encompass the overarching risk of misinterpretation that affects decision-making based on IRR. For example, while it's true that IRR assumes reinvestment of interim cash flows at the IRR rate, which may not be realistic, the critical concern