Which one of the following equates the present value of cash out flows and the present value of expected cash inflows from a project?

Correct option is B

The correct answer is (b) Internal Rate of Return.
The Internal Rate of Return (IRR) is the specific discount rate () that makes the Net Present Value (NPV) of a project equal to zero. In mathematical terms, it is the rate at which the sum of the discounted future cash inflows precisely matches the initial investment (cash outflow). It represents the break-even rate of return, helping managers determine if a project's potential yield exceeds the firm’s cost of capital.
INFORMATION BOOSTER
· Decision Rule: A project is generally accepted if the IRR is greater than the Cost of Capital (WACC).
· Time Value of Money: Unlike the payback period, IRR considers the timing of every cash flow over the project's entire life.
· Percentage Return: It provides a relative measure of profitability, making it popular among managers for comparing projects of different scales.
· Trial and Error: IRR is often found through interpolation or financial software since it involves solving for an unknown exponent in the NPV equation.
ADDITIONAL KNOWLEDGE
· Net Present Value is incorrect because it represents the difference between the PV of inflows and outflows, not the rate that equates them.
· Pay back Period is incorrect as it measures the time required to recover the initial investment, ignoring the time value of money.
· Accounting Rate of Return is incorrect because it is based on accounting profits rather than cash flows and does not utilize discounting.