ACCA Financial Management (F9) Certification Practice Exam

The Internal Rate of Return (IRR) is primarily used in financial management to evaluate the profitability of potential investments. It represents the discount rate at which the net present value (NPV) of all cash flows from a particular investment equals zero. Essentially, IRR helps in determining the rate of return an investor can expect to earn on an investment over its life.

When comparing various investment opportunities, the IRR can be a valuable tool that enables managers and investors to identify the projects that are expected to yield the highest returns. If the IRR exceeds the required rate of return or the cost of capital, the investment is generally considered favorable, indicating that it has the potential to add value to the company or investor's portfolio.

Other options, while related to investment evaluation, do not directly pertain to the functions of IRR. The measure is not designed to assess risk levels or determine the payback period, which focuses more on liquidity and the recovery of capital rather than overall profitability over time. Additionally, while financial stability can be evaluated through various financial ratios and metrics, IRR specifically assesses the profitability of investment projects.