PMI Agile Certified Practitioner (ACP) Practice Exam

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What does 'IRR' stand for in project management?

Internal Return Rate
Internal Rate of Return
Interest Rate Reserve
Inflation Rate Review

The correct answer is: Internal Rate of Return

'IRR' stands for Internal Rate of Return, which is a financial metric used in project management and capital budgeting to evaluate the profitability of an investment or project. It represents the annual rate of growth that an investment is expected to generate. The IRR is particularly useful because it provides a single percentage figure to help compare various investment opportunities, allowing project managers to make informed decisions about where to allocate resources. The Internal Rate of Return is calculated by finding the discount rate that makes the Net Present Value (NPV) of all cash flows (both incoming and outgoing) from a project equal to zero. A project is generally considered favorable if its IRR exceeds the required rate of return or the cost of capital, indicating that it is likely to generate value over time. In the context of project management, understanding IRR is essential for financial decision-making, as it allows project managers to assess the potential return on investment and prioritize projects that align with strategic objectives.