Which of the following is true of the internal rate of return of a project?
A) The discounted cash flow estimates are only as accurate as the original estimates of the profit.
B) It maximizes the net present value of the investment.
C) It neglects the timing of investment and cash flows.
D) It does not discriminate against projects that are long term or risky.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is a metric used to evaluate the profitability of potential investments. It is based on the concept of discounted cash flows, which means the future cash flows of a project are estimated and adjusted to their present value. The accuracy of the IRR calculation is directly dependent on the accuracy of these estimated cash flows. If the original profit estimates are inaccurate, the calculated IRR will also be inaccurate, making choice A correct. Choices B, C, and D are incorrect because the IRR does indeed consider the timing of cash flows (contrary to C), it does not maximize the net present value but rather finds the rate at which it is zero (contrary to B), and it can discriminate against long-term or risky projects due to its reliance on estimated cash flows and the reinvestment assumption (contrary to D).

Which of the Following Is True of the Internal Rate