Final answer:
The present value factor for IRR is computed as the sum of the present discounted values of the project's annual net cash flows, which helps in determining if an investment is worthy considering the opportunity cost of capital.
Step-by-step explanation:
When using Internal Rate of Return (IRR) to evaluate a capital investment, the present value factor is computed by the sum of the present values of the project's annual net cash flows. This method involves discounting future cash flows back to their present value using the project's IRR and then adding them up to determine if the sum of these present discounted values equals or exceeds the initial investment.
A financial investor will often use IRR as a tool to evaluate investment opportunities and calculate the present discounted value when considering the opportunity cost of capital, reflecting both the rate of return on other financial investments and a risk premium for potential risks associated with the specific investment under consideration.
When the internal rate of return is used to evaluate a capital investment, the present value factor is computed as the sum of the present values of the project's annual net cash flows.