When using the internal rate of return (IRR)investment rule,we compare:
A)the average return on the investment opportunity to returns on all other investment opportunities in the market.
B)the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity.
C)the NPV of the investment opportunity to the average return on the investment opportunity.
D)the average return on the investment opportunity to the risk-free rate of return.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) compares the average return on the investment opportunity to the returns on other alternatives in the market with equivalent risk and maturity. It is calculated as the discount rate at which the net present value of an investment equals zero, meaning that the investment is expected to generate enough returns to cover its costs and provide a positive return. Therefore, the IRR rule is used to evaluate the feasibility of an investment based on its expected rate of return relative to the risk and maturity of other investment opportunities in the market. Option A is incorrect because it compares the investment opportunity to all other investment opportunities, not just those with equivalent risk and maturity. Option C is incorrect because it compares the NPV of the investment to the average return, which are not directly related. Option D is incorrect because it compares the average return to the risk-free rate, which may not reflect the risk and return characteristics of the investment opportunity.

When Using the Internal Rate of Return (IRR)investment Rule,we Compare