An investment opportunity requires an immediate cash outlay of $45,000, and then an $80,000 cash outlay two years from now. Net returns of $10,000, $30,000, and $125,000 are expected at the end of each of the next three years, respectively.
-Rank these projects (best to worst) based on their IRRs.

Question

Quizplus · Accepted Answer

The Internal Rate of Return (IRR) is a metric used to evaluate the profitability of potential investments. It is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. In this scenario, without calculating the exact IRRs, we can infer that the project with the highest last-year return relative to its initial investment will likely have the highest IRR, given the substantial final year return compared to the initial outlays. Thus, the project with the $125,000 return in the last year (project 3) will likely have the highest IRR, followed by the project with the $30,000 return in the second year (project 2), and finally the project with the $10,000 return in the first year (project 1), making the correct ranking 3;2;1.

An Investment Opportunity Requires an Immediate Cash Outlay of $45,000