Which of the following are correct statements about the internal rate of return (IRR)? (Check all that apply.)Multiple select question.The higher the IRR, the better.IRR uses the time value of money.IRR uses accrual income as the measurement basis.IRR is expressed in dollars.
Question
Which of the following are correct statements about the internal rate of return (IRR)? (Check all that apply.)Multiple select question.The higher the IRR, the better.IRR uses the time value of money.IRR uses accrual income as the measurement basis.IRR is expressed in dollars.
Solution
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The higher the IRR, the better: This statement is correct. The Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. A higher IRR indicates a more profitable investment.
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IRR uses the time value of money: This statement is also correct. The IRR calculation takes into account the time value of money, which is the concept that money available today is worth more than the same amount in the future due to its potential earning capacity.
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IRR uses accrual income as the measurement basis: This statement is incorrect. The IRR does not use accrual income as the measurement basis. Instead, it uses cash flows. The IRR is the discount rate that makes the net present value (NPV) of all cash flows (both positive and negative) from a project or investment equal to zero.
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IRR is expressed in dollars: This statement is incorrect. The IRR is not expressed in dollars but as a percentage. It represents the annual growth rate that makes the NPV of future cash flows equal to the investment outlay.
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