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The Internal Rate of Return (IRR) is determined where the Net Present Value is
- a)positive
- b)negative
- c)zero
- d)None of the above
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
The Internal Rate of Return (IRR) is determined where the Net Present ...
Understanding Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is a crucial financial metric used to evaluate the profitability of potential investments. It represents the discount rate at which the Net Present Value (NPV) of all cash flows from a particular investment equals zero.
Why IRR equals zero NPV
- The primary goal of calculating IRR is to identify the rate at which an investment breaks even in terms of NPV.
- When the NPV is zero, it indicates that the present value of cash inflows equals the present value of cash outflows.
- Thus, at this point, the investment neither generates profit nor incurs a loss.
Comparison of NPV with IRR
- If NPV is positive: The investment is expected to generate a return greater than the cost of capital, suggesting it may be worthwhile.
- If NPV is negative: The investment is anticipated to yield a return lower than the cost of capital, indicating it may not be a good opportunity.
Conclusion
To summarize, the correct answer to the question regarding the determination of IRR is option 'C', as IRR is defined specifically at the point where NPV equals zero. This makes it a critical threshold for assessing investment viability.
Understanding IRR in relation to NPV helps investors make informed decisions by identifying the rate of return that justifies the investment cost.
The Internal Rate of Return (IRR) is a crucial financial metric used to evaluate the profitability of potential investments. It represents the discount rate at which the Net Present Value (NPV) of all cash flows from a particular investment equals zero.
Why IRR equals zero NPV
- The primary goal of calculating IRR is to identify the rate at which an investment breaks even in terms of NPV.
- When the NPV is zero, it indicates that the present value of cash inflows equals the present value of cash outflows.
- Thus, at this point, the investment neither generates profit nor incurs a loss.
Comparison of NPV with IRR
- If NPV is positive: The investment is expected to generate a return greater than the cost of capital, suggesting it may be worthwhile.
- If NPV is negative: The investment is anticipated to yield a return lower than the cost of capital, indicating it may not be a good opportunity.
Conclusion
To summarize, the correct answer to the question regarding the determination of IRR is option 'C', as IRR is defined specifically at the point where NPV equals zero. This makes it a critical threshold for assessing investment viability.
Understanding IRR in relation to NPV helps investors make informed decisions by identifying the rate of return that justifies the investment cost.
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The Internal Rate of Return (IRR) is determined where the Net Present ...
The Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flow from a particular project equal to zero.
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The Internal Rate of Return (IRR) is determined where the Net Present Value isa)positiveb)negativec)zerod)None of the aboveCorrect answer is option 'C'. Can you explain this answer?
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