Question

The interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost is called the ____. present value discount rate company cost of capital payback period internal rate of return

Answer 1

Answer:

The answer is: internal rate of return (IRR)

Explanation:

The internal rate of return (IRR) measures how profitable an investment is. Investments generate cash flows that are discounted to determine the present value of the cash flows, and the difference between the present value of the cash and the cost of the investment is the net present value (NPV). If NPV ≥ 0, then the investment is profitable.

When the investment's net present value is larger than 0, it means that its cash flows have a higher rate of return than the discount rate. To find the actual rate of return of the investment we must equal the NPV to 0. The easiest way to do this is using an excel spreadsheet and the IRR function =IRR(values,[guess])