Which value calculation estimates future cash flows to determine the interest rate of an investment?

Which value calculation estimates future cash flows to determine the interest rate of an investment?

• A. Net Present Value
• B. Internal Rate of Return (IRR)
• C. Return on Investment
• D. Future Value

Answer: (B)

The Internal Rate of Return (IRR) is a key financial metric used to evaluate the attractiveness of an investment or project. It represents the interest rate at which the net present value (NPV) of future cash flows equals zero. Essentially, the IRR is the discount rate that makes an investment's projected cash flows equal to its initial cost. In practical terms, when assessing a potential investment, investors look at the cash inflows expected over time and calculate the IRR to understand the rate of return they can expect. If the IRR is greater than the cost of capital or required rate of return, the investment is considered favorable. While other options like Net Present Value and Future Value are important for financial calculations, they do not specifically estimate the interest rate for an investment. Return on Investment provides a ratio of profitability, but it does not involve the evaluation of future cash flows in the context of determining an interest rate. Therefore, IRR is the correct choice as it directly relates to calculating the expected rate of return based on projected future cash flows.

The Internal Rate of Return (IRR) is a key financial metric used to evaluate the attractiveness of an investment or project. It represents the interest rate at which the net present value (NPV) of future cash flows equals zero. Essentially, the IRR is the discount rate that makes an investment's projected cash flows equal to its initial cost.

In practical terms, when assessing a potential investment, investors look at the cash inflows expected over time and calculate the IRR to understand the rate of return they can expect. If the IRR is greater than the cost of capital or required rate of return, the investment is considered favorable.

While other options like Net Present Value and Future Value are important for financial calculations, they do not specifically estimate the interest rate for an investment. Return on Investment provides a ratio of profitability, but it does not involve the evaluation of future cash flows in the context of determining an interest rate. Therefore, IRR is the correct choice as it directly relates to calculating the expected rate of return based on projected future cash flows.