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ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal

Which of the following statements about the internal rate of return (IRR) of a conventional project is correct?

The IRR is the discount rate at which the project's net present value equals zero. A project is normally accepted if its IRR exceeds the cost of capital. It is a distinct measure from the cost of capital, payback period or accounting rate of return.

  1. AIt is the discount rate at which the project's NPV equals zeroCorrect
  2. BIt is the discount rate at which the payback period equals the project life
  3. CIt is the company's weighted average cost of capital
  4. DIt is the accounting rate of return adjusted for inflation

Explanation

IRR is defined as the discount rate that gives an NPV of zero. It is not the cost of capital, though it is compared with it when deciding whether to accept a project. It is unrelated to payback or accounting return.

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