PMI Agile Certified Practitioner (ACP) Practice Exam

What is the significance of having a higher Internal Rate of Return (IRR)?

1. It suggests lower investment risk

2. It indicates higher profit as an earned interest rate

3. It means less project oversight is needed

4. It supports lower project costs

The correct answer is: It indicates higher profit as an earned interest rate

The significance of having a higher Internal Rate of Return (IRR) primarily lies in its ability to indicate a higher profit potential as an earned interest rate. The IRR represents the rate at which the net present value of future cash flows from an investment equals zero. In simple terms, a higher IRR suggests that the investment is expected to generate more revenue relative to its costs, reflecting its efficiency at converting invested capital into profits. Investors typically compare the IRR to their required rate of return, or the minimum acceptable return on investment. If the IRR is greater than this threshold, the investment is potentially a good one, as it implies that the project is likely to yield significant returns over its lifespan. Thus, a higher IRR is a key indicator for selecting projects that align with financial goals, as it signifies increased profitability. While aspects such as risk, project oversight, and costs can indirectly relate to IRR, these factors are not directly reflected by the IRR itself, and they may vary based on the specific project dynamics and external circumstances.