Which of the following statements regarding internal rate of return IRR is correct?

Which of the following statements regarding internal rate of return IRR is correct?

The correct answer is a. 1. IRR is the rate at which the net present value is nil. It is the discounted value of cash inflow minus the original investment and hence it is not the difference between two project’s cashflows.

Which one of the following statements related to the internal rate of return IRR is correct quizlet?

Which one of the following statements related to the internal rate of return (IRR) is correct? The IRR is equal to the required return when the net present value is equal to zero.

What are internal rates?

The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. It is the annual return that makes the NPV equal to zero. Generally speaking, the higher an internal rate of return, the more desirable an investment is to undertake.

What is the internal rate of return quizlet?

The internal rate of return is the discount rate that sets the net present value of the project to zero, so the present value of the costs equals the present value of the cash inflows. The cost of Project A can be calculated by determining the present value of the annual annuity of $10,000 cash flows discounted at 15%.

Which on capital is called cost of capital?

What Is Cost of Capital? Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. When analysts and investors discuss the cost of capital, they typically mean the weighted average of a firm’s cost of debt and cost of equity blended together.

Which variable is not known in internal rate of return?

(Cost paid = present value of future cash flows, and hence, the net present value = 0). So, it can be explained as the discount rate at which PV of cash inflow = PV of cash outflow. Hence, we find out the Discount rate, which is unknown in IRR.

Which one of the following is the best example of two mutually exclusive project?

Which one of the following is the best example of two mutually exclusive projects? -Using an empty warehouse to store both raw materials and finished goods.

What is the profitability index formula?

The profitability index is calculated by dividing the present value of future cash flows that will be generated by the project by the initial cost of the project. A profitability index of 1 indicates that the project will break even. If it is less than 1, the costs outweigh the benefits.

What is internal rate of return with example?

Internal rate of return or IRR is that rate of return at which NPV from the above investment & cash flows will become zero. In the above example, if we replace 8% with 13.92%, NPV will become zero, and that’s your IRR. Therefore, IRR is defined as the discount rate at which the NPV of a project becomes zero.

Should IRR be higher than discount rate?

If a project is expected to have an IRR greater than the rate used to discount the cash flows, then the project adds value to the business. If the IRR is less than the discount rate, it destroys value. The decision process to accept or reject a project is known as the IRR rule.

How do I calculate the internal rate of return?

Internal rate of return is a discount rate that is used in project analysis or capital budgeting that makes the net present value (NPV) of future cash flows exactly zero….How to Calculate Internal Rate of Return

1. C = Cash Flow at time t.
2. IRR = discount rate/internal rate of return expressed as a decimal.
3. t = time period.