Question

The internal rate of return is the discount rate at which the net present value is Select one:

a. positive.

b. There is no relationship between these two concepts.

c. equal to zero.

d. negative.

Answer 1

IRR is the metric used in the capital budgeting decisions to estimate the profitability of investments. IRR is calculated by the same formula as NPV does.  

NPV = -CF0 + CF1/(1+r) + CF2/(1+r)^2+...............CF3/(1+r)^n

when we put NPV = 0 in this formula we get the formula for IRR

0 = -CF0 + CF1/(1+r) + CF2/(1+r)^2+...............CF3/(1+r)^n

where CF0 = Initial outlay

CF1,CF2..CFn are the cash flows in the year 1,2,....n respectively

and r is the internal rate of return which will be used for discounting the cash flows.

So Answer is option C

The IRR is the discount rate at which the NPV is equal to 0