The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly.

Question

Quizplus · Accepted Answer

The IRR (Internal Rate of Return) is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. The timing of cash flows does not affect the sensitivity of IRR to changes in the discount rate; rather, it is the magnitude and timing of the cash flows themselves that determine the IRR. The sensitivity of IRR to changes in the discount rate is more related to the project's overall risk and cash flow pattern, not the speed of cash inflow.

The IRR of a Project Whose Cash Flows Accrue Relatively