The internal rate of return of a capital investment

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate at which the net present value of the investment is equal to zero. Therefore, it is dependent on the cost of capital since changing the discount rate changes the present value of future cash flows. Choice B is incorrect because the IRR formula is not just based on the annual net cash flows but rather the timing and magnitude of all cash flows. Choice C is correct because if the IRR is less than the cost of capital, the project is not generating enough return to cover the cost of funding it. Choice D is correct because the IRR is a measure of the return on the investment and is similar to the yield to maturity on a bond, which is a measure of the return on a bond based on its purchase price, coupon, and maturity.

The Internal Rate of Return of a Capital Investment