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Which one of the following defines the internal rate of return for a project? 1
Which one of the following defines the internal rate of return for a project?
1.Discount rate that creates a zero cash flow from assets t
2.Discount rate that results in a zero net present value for the project
3. Discount rate that results in a net present value equal to the project's initial cost
4.Rate of return required by
5.the project's investors The project's current market rate of return
Expert Solution
ANSWER -
Internal rate of return (IRR) 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.
How it works/Example:
The formula for IRR is:
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and
IRR equals the project's internal rate of return.
Option 3 is correct answer
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