Corporate Finance Practice Test 2025 – The Complete All-in-One Guide to Exam Success!

The highlighted advantage of the internal rate of return (IRR) is that it simplifies the comparisons between different projects. IRR is a metric that estimates the profitability of potential investments, and it expresses the return as a percentage. This allows investors to easily compare the rates of return on different projects or investments, making it straightforward to assess which project would yield the best return.

When using IRR, projects can be ranked based on their internal rates, and this can significantly aid in decision-making when capital is limited. If one project has a higher IRR than another, it’s often interpreted as a better investment, assuming other factors such as project size and scale are equal. This comparability makes IRR a valuable tool in capital budgeting and investment analysis.

Other choices do not emphasize this comparative advantage. For instance, disregarding the need for a required return is inaccurate because the IRR implicitly assumes a comparison against a benchmark return. Universality in accounting practices is also not a significant characteristic of IRR, as it is not commonly used in all financial accounting scenarios, which might prioritize net present value (NPV) for its robust decision-making qualities. Lastly, the claim that IRR guarantees a higher return than the cost of capital is misleading; while an