Question

1. Using the IRR to evaluate an investment opportunity has an advantage over the NPV criteria

   1. None of the other answers are correct

   2. since the IRR doesn’t depend on the interest rate

   3. when there is no opportunity to reinvest the proceeds back and in “scale us” the operation

   4. because the IRR always agrees with the NPV criteria and is generally easier to compute than the NPV

Which answer is correct?

Answer 1

Answer is Since the IRR doesn’t depend on the interest rate

Internal rate of return (IRR) is the rate of return at which the present value of cash inflows is equal to present value of cash outflows. In other words, IRR gives the rate at which Net present value is zero. If IRR is higher than cost of capital the project is accepted. Net present value is a technique of capital budgeting which uses interest rate (usually cost of capital) in computing present value of cash inflows and see if net present value is positive after deducting initial investment. Internal rate of return is considered superior to NPV since it gives the rate of return compared to interest rate used in NPV. Hence answer is option b)