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The internal rate of return represents the rate of interest that recovers the initial investment outlay....

The internal rate of return represents the rate of interest that recovers the initial investment outlay. Discuss the validity of this statement.

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Expert Solution

The statement is valid only undercertain conditions. First, this assumes conventional projects i.e., projects in which there is one initial cash outflow followed by cash inflows only. Second, all the incoming cash flows are reinvested at the Internal rate of return.

The internal rate of return is the rate of return at which NPV is equal to zero. Hence, at this rate, initial investment outlay is recovered, provided all the incoming cash flows are reinvested at the Internal rate of return.

jeff jeffy answered 2 years ago
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