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Question:
- Project A:
+ The original investment: $1 million.
+ The present value of the cash inflows: $1 million.
+ The discount rate: 4%.
- Project B:
+ The original investment: $1.4 million.
+ The present value of the cash inflows: $1.4 million.
+ The discount rate: 6%.
- Project C:
+ The original investment: $1.8 million.
+ The present value of the cash inflows: $1.8 million.
+ The discount rate: 7%.
What is the best project to be chosen by the selection committee, assuming that there is only one project to be selected?
A
Project C.
explanation
IRR is defined as the discount rate when the current value of the cash inflows equals the original investment. Project C’s original investment is same as the present value of its cash inflows at a discount rate of 7%.
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