Question

Which of the following is true regarding the internal rate of return for a project? a. Managers may believe (in most cases, incorrectly) that the internal rate of return is the compounded rate of return earned by the initial investment. b. If the internal rate of return is more than the required rate of return, the project will be accepted. c. If the internal rate of return is equal to the required rate of return, the net present value of the project is zero. d. If the internal rate of return is less than the required rate of return, the project will be rejected. e. All of these choices are correct.

Answer 1

Answer: Option E

Explanation:

A. Internal rate of return is calculated on the assumption that investor will reinvest the return earned, therefore it is compounded, hence, it is true.

B. The return that the investment gives is called IRR, hence if the return earned is more than return expected then the project will be accepted, thus option B is correct.

C. IRR is the rate at which NPV is calculated hence if the IRR is zero NPV is also zero. Thus, answer C is also correct.

D. If the rate earned is less than the return expected then the project will not be expected.

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Hence all the options are correct.