Question

Internal rate of return is calculated by: A. Finding the discount rate that forces the NPV...

Internal rate of return is calculated by:

A. Finding the discount rate that forces the NPV of the project to zero.

B. Adjusting the initial outlay of the project so that it is equal to the discounted cash flows.

C. Adjusting the inflow until the NPV is zero.

D. All of the above.

E. None of the above.

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Answer #1

We know that IRR is the discount rate at which present values of project inflows and outflows i.e. NPV is zero. IRR of the project is determined by trial and error method where a rate is guessed and equated to get NPV as zero. It is also a measure of adjusting the inflow until the NPV is zero and adjusting the initial outlay of the project so that it is equal to the discounted cash flows whereby getting NPV as zero.

So the correct answer to this question will be Option D i.e. all of the above.

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