Question

Which of the following statements defines the internal rate of return (IRR) for a project?

A. Discount rate which results in a zero NPV

B. Discount rate which results in a NPV equal to the project's initial cost

C. Rate of return required by the project's investors

D. The current market rate of return for projects of similar risk

Answer 1

IRR IS DEFINED AS THE RATE OF RETURN WHERE PROEJECT HAS ZERO NPV.

IN OTHER WORDS, IT IS THE POINT WHERE (PV OF CFAT = INVESTMENT), THAT IS NPV =0

SO CORRECT ANSWER IS : A : DISCOUNT FRATE WHICH RESULTS IN ZERO NPV.

OPTION "B" IN INCORRECT BECAUSE AT IRR, NPV IS EQUAL TO ZERO AND NOT EQUAL TO INITIAL INVESTMENT

OPTION "C" IS INCORRECT BECAUSE RATE OF RETURN REQUIRED BY PROJECT'S INVESTORS IS EQUAL TO MINIMUM RETURN EXPECTED BY THEM TO INDUCE TO ENTER INTO THE PROEJCT. SO IT CAN NOT BE TERMED AS IRR.

OPTIO "D" IS ALSO INCORRECT. BECAUSE CURRENT MARKET RATE OF RETURN IS RETURN EXPECTED BY INVESTORS FROM MARKET, SO THIS IS ALSO NOT IRR

SO ANSWER IS :"A"

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