The internal rate of return (IRR) is a measure used to evaluate the profitability of an investment. The project is considered acceptable if its IRR is greater than or equal to the required rate of return (RRR), which is the minimum return an organization expects from an investment.
Correct Answer (C - Compare to the Required Rate of Return)
The required rate of return (RRR) represents the minimum acceptable return for the project.
If IRR ≥ RRR, the project is acceptable. If IRR < RRR, the project is rejected.
The IIA Practice Guide: Auditing Capital Investments suggests comparing IRR to the RRR to ensure financial feasibility.
Why Other Options Are Incorrect:
Option A (Compare to the annual cost of capital):
The cost of capital (WACC - Weighted Average Cost of Capital) is an important factor, but RRR is the direct benchmark for IRR comparison.
Option B (Compare to the annual interest rate):
Interest rates do not determine project feasibility—they only affect financing costs.
Option D (Compare to the net present value - NPV):
NPV and IRR are related, but they serve different purposes.
IRR is compared against RRR, while NPV measures absolute profitability in dollar terms.
IIA Practice Guide: Auditing Capital Investments – Discusses IRR, RRR, and investment decision-making.
IIA GTAG 3: Business Case Development – Explains how financial metrics like IRR and RRR are used in decision-making.
Step-by-Step Explanation:IIA References for Validation:Thus, C is the correct answer because IRR should be compared to the required rate of return to determine project acceptability.
