IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
In project appraisal, the internal rate of return (IRR) of a series of cashflows is best defined as:
The IRR is the interest rate at which the net present value of all the project's cashflows is exactly zero, meaning the present value of inflows equals the present value of outlays. It is an equation-of-value solution and allows for the timing of cashflows.
- AThe rate of interest at which the net present value of the cashflows equals zeroCorrect
- BThe average of the annual percentage profits over the project's life
- CThe rate at which total receipts equal total outlays without discounting
- DThe rate at which the accumulated value of the receipts equals the initial outlay at the risk-free rate
- The rate of interest that maximises the net present value of the project
Explanation
The IRR is the effective rate of interest i at which the present value of inflows equals the present value of outlays, so the NPV is zero. Averaging profits or ignoring discounting ignores the timing of cashflows. Maximising NPV is not a defining property of the IRR.
Did you get it right without looking?
One question tells you little. A timed set on Project appraisal shows your real accuracy, how long you take and where you lose marks.
More Project appraisal questions
- A project requires outlays of ₹10,000 at time 0 and ₹10,000 at time 1, and returns ₹23,100 at time 2. What is the IRR (effective annual)?
- A project costs Rs 200,000 now. It yields cash flows at the end of years 1 to 4 of Rs 60,000, then each later flow is 5% higher than the one…
- A project costs Rs 5,00,000 and yields Rs 1,00,000 at the end of each year for as long as required. At an effective annual rate of 8%, what …
- A project costs Rs 100,000 now and returns Rs 55,000 at time 1 and Rs 60,500 at time 2 (its internal rate of return is 10% per annum). The f…
- A project costs Rs 100,000 today and returns Rs 40,000 at the end of each of the next 3 years. Using a discount rate of 10% per annum effect…
- A project requires an outlay of ₹1,00,000 now and pays ₹60,000 at the end of each of the next two years. Using a discount rate of 10% per an…