Certified Financial Planner (CFP) Practice Exam

To determine the compounded rate of return, or internal rate of return (IRR), for Kevin's investment in Acme, Inc. stock, it is important to understand that IRR reflects the annualized effective interest rate earned on an investment over a specified period of time based on its cash flows. It essentially equates the present value of cash inflows with the present value of cash outflows, providing a comprehensive measure of an investment’s profitability.

If Kevin successfully calculated the IRR to be approximately 13.11%, it indicates that over the duration of his investment, his earnings compounded at an annual rate of 13.11%. This rate essentially demonstrates how effectively Kevin's capital has grown when considering the timing and scale of cash flows associated with the investment.

An IRR of 13.11% would imply that Kevin's investment outperformed many traditional benchmarks, such as savings accounts or government bonds, which typically offer lower rates of return. Therefore, identifying the IRR as 13.11% suggests that the investment in Acme, Inc. stock was a favorable decision, yielding significant compounded returns over the investment period when all variables are taken into account.

In financial decision-making, understanding IRR is crucial because it helps investors gauge the