What capital budgeting technique calculates the discount rate that sets the Net Present Value (NPV) of a project to zero?
AProfitability Index
BInternal Rate of Return (IRR)
CPayback Period
DAccounting Rate of Return
Explanation
* Internal Rate of Return (IRR) is the discount rate at which the present value of expected cash inflows equals initial investment.
* Projects are accepted if their IRR exceeds the cost of capital (hurdle rate).
* When evaluating mutually exclusive projects, IRR can sometimes conflict with NPV if project scales differ.
Exam Relevance
- Topic: Capital Budgeting
- Subtopic: Investment Decision Rules
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