7. Internal rate of return [LO 9.5] Concerning IRR:

1. Describe how the IRR is calculated, and describe the information this measure provides about a sequence of cash flows. What is the IRR criterion decision rule?

2. What is the relationship between IRR and NPV? Are there any situations in which you might prefer one method over the other?

Explain.

3. Despite its shortcomings in some situations, why do most financial managers use IRR along with NPV when evaluating projects? Can you think of a situation in which IRR might be a more appropriate measure to use than NPV? Explain.