Internal rate of return is described as what?

Internal rate of return is described as what?

• A. A discounted cash flow technique that calculates the annual percentage return given by a project.
• B. The time it takes to recover the initial investment.
• C. The difference between the present value of inflows and outlays.
• D. The required return by investors.

Answer: (A)

Internal rate of return is the discount rate that makes the net present value of a project’s cash flows equal to zero. It represents the annual percentage return the project is expected to earn, assuming cash flows can be reinvested at that same rate. This aligns with describing IRR as a discounted cash flow technique that yields the project’s own annual return. The payback period, by contrast, only tells you how long to recover the initial outlay and ignores money time value after that. The net present value is the difference between the present value of inflows and outflows at a given rate, not the rate itself. The required return by investors is the hurdle rate or cost of capital used for comparison, whereas IRR is the project’s own rate of return.

Internal rate of return is the discount rate that makes the net present value of a project’s cash flows equal to zero. It represents the annual percentage return the project is expected to earn, assuming cash flows can be reinvested at that same rate. This aligns with describing IRR as a discounted cash flow technique that yields the project’s own annual return. The payback period, by contrast, only tells you how long to recover the initial outlay and ignores money time value after that. The net present value is the difference between the present value of inflows and outflows at a given rate, not the rate itself. The required return by investors is the hurdle rate or cost of capital used for comparison, whereas IRR is the project’s own rate of return.