Question

The internal rate of return method assumes that a project's cash flows are reinvested at the: Select one: A. required rate of return. B. simple rate of return. C. payback rate of return. D. internal rate of return.

Answer 1

Answer:

D. internal rate of return.

Explanation:

The internal rate of return (IRR) is defined as the discount rate of future cash flows that makes the Net Present Value (NPV) of a project equal to zero.

This means that initial cash flow of the project is equal to future expected values of cash flow.

This implies that the reinvestment in a project is discounted by the IRR itself.

The IRR is used to determine how viable a project is. If the project eventually has an IRR greater than the amount used to discount the cash flows, the project is making profit.