Free PMI Project Management Professional (PMP) Practice Question

The correct answer is False. While a higher IRR can indicate a potentially more attractive investment, it does not always mean that a project is more profitable in absolute terms. IRR is a relative measure of a project's return on investment, expressed as a percentage. It doesn't account for the scale of the project or the absolute amount of money earned.

For example:

• Project A: Initial investment of $100,000, IRR of 20%
• Project B: Initial investment of $1,000,000, IRR of 15%

Although Project A has a higher IRR, Project B might generate more total profit due to its larger scale. Additionally, IRR has other limitations:

1. It assumes reinvestment at the same rate, which may not be realistic.
2. It doesn't consider the project's size or duration.
3. For projects with unconventional cash flows, there might be multiple IRR values.

Project managers should use IRR in conjunction with other financial metrics like Net Present Value (NPV) and consider non-financial factors for a comprehensive project evaluation.