Which of the Following Statements Concerning the Internal Rate of Return

question 4

Multiple Choice

Which of the following statements concerning the internal rate of return method of capital budgeting is correct?

• A) When the internal rate of return method is employed a direct relationship will exist between the interest rate chosen and the present value of future cash flows.
• B) The interest rate that will discount future cash flows so that their present value is exactly equal to the cost of the investment is the cost of capital.
• C) The internal rate of return is the discount rate that will produce a positive net present value for the investment.
• D) When the net present value is equal to zero, the cost of capital (discount rate) and the internal rate of return are equal.

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Definitions:

Effective Interest Method

An accounting technique used to allocate the interest expense or income of a bond over its life in a way that yields a constant rate of return.

Interest Expense

The cost incurred by an entity for borrowed funds, which is considered a non-operating expense on the income statement.

Semiannually

Occurring twice a year, typically used in the context of payments, interest accruals, or reporting periods.