When evaluating projects using internal rate of return,
A) projects having lower early-year cash flows tend to be preferred at higher discount rates.
B) projects having higher early-year cash flows tend to be preferred at higher discount rates.
C) projects having higher early-year cash flows tend to be preferred at lower discount rates.
D) the discount rate and magnitude of cash flows do not affect internal rate of return.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that sets the net present value of an investment project equal to zero. When evaluating projects using IRR, projects with higher early-year cash flows tend to be preferred because they generate positive cash flows early on, improving the project's liquidity and lowering the risk. As the discount rate increases, it becomes more difficult for the project to generate positive cash flows in the early years, making it less attractive. Therefore, projects with higher early-year cash flows tend to be preferred at higher discount rates.

When Evaluating Projects Using Internal Rate of Return