The internal rate of return for a project will increase if:
A)the initial cost of the project can be reduced.
B)the total amount of the cash inﬂows is reduced.
C)each cash inﬂow is moved such that it occurs one year later than originally projected.
D)the required rate of return is reduced.
E)the salvage value of the project is omitted from the analysis.

Question

Quizplus · Accepted Answer

Reducing the initial cost of the project will increase the internal rate of return. This is because the IRR represents the discount rate at which the net present value of cash inflows equals the initial investment, therefore, reducing the initial cost will decrease the amount that needs to be discounted, resulting in a higher IRR. Choices B, C, D, and E will all decrease the internal rate of return.

The Internal Rate of Return for a Project Will Increase