The internal rate of return of an investment is:
A) the same as return on investment.
B) zero when the present value of an investment equals its cost.
C) the interest rate that equates the present value of an investment with its cost.
D) equal to the market rate of interest when an investment is made.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the interest rate that makes the net present value (NPV) of all cash flows from a particular investment equal to zero. In other words, it is the discount rate at which the present value of all future cash flows from the investment is equal to the initial cost of the investment. Therefore, option C is the correct answer. A is incorrect because although return on investment may be related to IRR, it is not the same thing. B is incorrect because while it is true that the IRR formula requires the present value of cash inflows to equal the cost of the investment (i.e. NPV = 0), this situation does not indicate that the IRR is necessarily zero. D is also incorrect because the market rate of interest is not necessarily equal to the IRR.

The Internal Rate of Return of an Investment Is