There are two basic steps in calculating the internal rate of return.Which of the following represents those two steps?
A) (1) Compute the PV factor for the project and (2) compare it to the hurdle rate.
B) (1) Compute the PV factor for the project and (2) identify the discount rate.
C) (1) Identify the discount rate and (2) compare the IRR to the hurdle rate.
D) (1) Compare IRR to the hurdle rate and (2) accept or reject the project.
E) (1) Select the hurdle rate and (2) compute the PV factor for the project.

Question

Quizplus · Accepted Answer

The two basic steps in calculating the internal rate of return are (1) computing the present value factor for the project and (2) identifying the discount rate that makes the net present value equal to zero. Therefore, option B, which states these two steps correctly, is the best choice. Option A is incorrect because it mentions comparing the PV factor to the hurdle rate instead of identifying the discount rate. Option C is incorrect because it states that the discount rate needs to be identified first, which is not correct. Option D is incorrect because accepting or rejecting the project is not a step in calculating the IRR. Option E is incorrect because selecting the hurdle rate is not one of the steps in calculating the IRR, although the hurdle rate may be used as a benchmark to compare the IRR.

There Are Two Basic Steps in Calculating the Internal Rate