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As the number of investments made by a firm increases, its internal rate of return
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- declines due to diminishing marginal productivity.
- declines because the market rate of interest will fall, ceteris paribus.
- increases to compensate the firm for the current consumption foregone.
- increases because the level of savings will fall.
- declines due to diminishing marginal productivity.
Correct Option: C
Internal rates of return are commonly used to evaluate the desirability of investments or projects. The higher a project's internal rate of return, the more desirable it is to undertake the project. A firm (or individual), in theory, undertakes all projects or investments available with IRRs that exceed the cost of capital. As the number of investments increase, its internal rate of return is greater than an established minimum acceptable rate of return or cost of capital.
