ACCA Financial Management (F9) Certification Practice Exam

Which component is NOT part of the calculation for the IRR?

1. NPVa

2. Discount rate

3. a

4. NPVb

The correct answer is: Discount rate

The internal rate of return (IRR) is defined as the discount rate that makes the net present value (NPV) of a project equal to zero. Therefore, when calculating IRR, the focus is on determining a specific rate at which the NPV turns to zero, rather than using a predetermined discount rate. By understanding the components of the IRR calculation, we see that NPV calculations are involved, which means Net Present Value at various discount rates (hence the references to NPVa and NPVb) play a role. The process inherently involves looking for the discount rate that equates NPV to zero, rather than assuming a particular discount rate as part of the calculation. The component that does not fit within this context is the concept of a given discount rate, which is not part of the IRR calculation itself but is instead a general concept used in financial analysis. Thus, identifying that a specific discount rate is not a part of the IRR calculation clarifies the rationale behind why it’s correct to state that it is not included in deriving the IRR.