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The internal rate of return represents the rate of interest that recovers the initial investment outlay....

The internal rate of return represents the rate of interest that recovers the initial investment outlay. Discuss the validity of this statement.

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Answer #1


The statement is valid.


Explanation - The internal rate of return is the rate of return at which NPV is equal to zero. Hence, at this rate, initial investment outlay is recovered, provided all the incoming cash flows are reinvested at the Internal rate of return. IRR is the discount rate at which NPV is zero. NPV is zero when the present value of cash inflows equals the initial investment. Therefore, IRR represents the rate of interest that recovers the initial investment outlay on a discounted cash flow basis.

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