The internal rate of return (IRR) of a project that generates its largest cash flows in the early years of its life is more sensitive to changes in the firm's required rate of return than is the IRR of a project whose largest cash flows come later in life.

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The IRR is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. Projects that generate larger cash flows in the early years are less sensitive to changes in the discount rate because the bulk of their value is realized earlier and thus is less affected by the time value of money. Projects with larger cash flows later in their life are more sensitive to changes in the discount rate, as the present value of those later cash flows is more heavily impacted by changes in the rate.

The Internal Rate of Return (IRR) of a Project That