The internal rate of return for a project will increase if:
A)the required rate of return is reduced.
B)each cash inflow is moved such that it occurs one year later than originally projected.
C)the total amount of the cash inflows is reduced.
D)the initial cost of the project can be reduced.
E)the salvage value of the project is omitted from the analysis.

Question

Quizplus · Accepted Answer

The internal rate of return for a project is the discount rate at which the net present value of its cash inflows equals the net present value of its cash outflows. Therefore, reducing the initial cost of a project will increase the net cash inflows and thus, increase the internal rate of return. Choice A is incorrect because a reduction in the required rate of return would make it easier for a project to meet its target return, but it would not necessarily increase the internal rate of return. Choice B is incorrect because delaying the cash inflows would decrease the present value of the inflows and reduce the internal rate of return. Choice C is incorrect because reducing the total amount of cash inflows would decrease the net present value of the inflows and reduce the internal rate of return. Choice E is incorrect because omitting the salvage value from the analysis would decrease the net cash inflows and reduce the internal rate of return.

The Internal Rate of Return for a Project Will Increase