Question

The IRR measures which of the following? a. The return earned on the initial investment. b....

  1. The IRR measures which of the following?

    a.

    The return earned on the initial investment.
    b.

    The average return earned over time on the funds invested.
    c.

    The discount rate at which NPV is zero.
    d.

    The overall return if the project’s funds are invested at the cost of capital.
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Homework Answers

Answer #1

Internal Rate of Return i.e. IRR is the discount rate at which Present Value of Cash Inflows is equal to Present Value of Cash Ouflows. It is the discount rate which makes the net present value from all cash flows to zero.

Since in IRR we need to find the rate at which NPV will be zero, thus it is calculated using trial and error method.


Ans: The IRR measures which of the following?
Optiion c is the correct answer i.e the discount rate at which NPV is zero.

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