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Which one of the following is an acceptable definition of the internal rate of return?

1. The discount rate that results in a zero Net Present Value for a project.2. The time it takes to repay the initial investment.3. The discounted cash flows as a percentage of the amount invested.4. The annualized profits as a percentage of the amount invested.

Financial Management
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Question added by Deleted user
Date Posted: 2013/08/19
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Deleted user
by Deleted user

Option1 is the right answer

Mohamed Mahfouz
by Mohamed Mahfouz , Group Financial Manager , Ahdaf Holding (Al-Hussein and Al-Afaliq Group of Companies )

number3 is the right one 

Mohammad Al-Shayeb
by Mohammad Al-Shayeb , Finance Manager , Syriatel


1- Answer1 is correct ( The IRR is the rate that makes the present value of the expected cash inflows equal the present value of the expected cash outflows ).

2- Answer2 is wrong (It is not a time, it is the discounted rate that makes the present value of the expected cash inflows equal the present value of the expected cash outflows ).
 
3- Answer3 is wrong (It is not a percentage of the amount invested, it is the discounted rate that makes the present value of the expected cash inflows equal the present value of the expected cash outflows ).
 
4- Answer4 is wrong (It doesn't make any profit or loss since it makes the present value of the expected cash inflows equal the present value of the expected cash outflows ).
   

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