PFMP · Question #639
As you work to determine which of four possible components to optimize the portfolio, assume you are using the internal rate of return as the key crite rion to make your recommendation. Only one new…
The correct answer is C. Program B. Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of a project equals zero-essentially the annualized return on investment. When IRR is the sole selection criterion and only one component can be added due to financial constraints, you…
Question
As you work to determine which of four possible components to optimize the portfolio, assume you are using the internal rate of return as the key crite rion to make your recommendation. Only one new component can be added based on financial constraints. Each of the four potential components has benefits that support the strategic plan. Based on the following data, you recommend:
Options
- AProject A
- BProgram A
- CProgram B
- DProject B
How the community answered
(36 responses)- A14% (5)
- B6% (2)
- C72% (26)
- D8% (3)
Explanation
Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of a project equals zero-essentially the annualized return on investment. When IRR is the sole selection criterion and only one component can be added due to financial constraints, you select the component with the highest IRR. Based on the data provided in the original question (not reproduced here), Program B has the highest IRR among the four candidates (Project A, Program A, Program B, Project B). A higher IRR indicates a more efficient use of capital. All four options are noted as supporting the strategic plan, so strategic alignment does not differentiate them-only IRR does.
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