The IRR of a project is the discount rate that ________. a. Makes the NPV equal to
Question:
The IRR of a project is the discount rate that ________.
a. Makes the NPV equal to zero
b. Equates the present value of the cash inflows to the future value of the cash outflows
c. Makes the NPV positive
d. Equates the present value of cash outflows to the future value of the cash inflows
Step by Step Answer:
Answer The internal rate of return takes into account time value of money IRR i...View the full answer
Related Video
The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.
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