A new manager received computations of the internal rate of return regarding his project proposal. What should the manager compare the computation results to in order to determine whether the project is potentially acceptable?
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. It is used to evaluate the profitability of investments.
Option A (Annual cost of capital) – While related, the IRR should be compared directly to the required rate of return (hurdle rate).
Option B (Annual interest rate) – Not always relevant, as the cost of borrowing may differ from the required return on investments.
Option D (Compare to NPV) – NPV is a different method of capital budgeting; while related, it is not used for direct comparison with IRR.
Since the IRR is accepted if it meets or exceeds the required rate of return, Option C is correct.
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