#3 Suppose you calculate the Internal Rate of Return (IRR) for a project, given

Question

#3

Suppose you calculate the Internal Rate of Return (IRR) for a project, given the project cash flows and a required rate of return of 12%. After you calculate the IRR, you discover that the actual required rate of return is 14%. The new IRR you calculate using a required rate of return of 14% would be

a. lower than the IRR calculated with a required rate of return of 12%.

b. higher than the IRR calculated with a required rate of return of 12%.

c. the same as the IRR calculated with a required rate of return of 12%.

d. uncertain because it could be either lower or higher than the IRR calculated with a required rate of return of 12%.

a. lower than the IRR calculated with a required rate of return of 12%.

b. higher than the IRR calculated with a required rate of return of 12%.

c. the same as the IRR calculated with a required rate of return of 12%.

d. uncertain because it could be either lower or higher than the IRR calculated with a required rate of return of 12%.

Explanation / Answer

Ans C : The same as the IRR caclulated with a required rate of return 12%

             IRR is calculated irrespective of cost of capital. While calculating IRR required rate of return is not considered.

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