Which one of the following defines the internal rate of return for a project?
A)Discount rate that creates a zero cash flow from assets
B)Discount rate that results in a zero net present value for the project
C)Discount rate that results in a net present value equal to the project's initial cost
D)Rate of return required by the project's investors
E)The project's current market rate of return

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that sets the net present value (NPV) of all cash flows from a project equal to zero. In other words, it is the rate of return that makes the present value of the project's cash inflows equal to the present value of its cash outflows, resulting in an NPV of zero. Choice A is incorrect because it refers to the break-even point, not the IRR. Choice C is incorrect because it refers to the initial cost of the project, not the IRR. Choice D is incorrect because the IRR is a measure of the project's profitability, not the investors' required rate of return. Choice E is incorrect because the project's market rate of return may be different from its IRR.

Which One of the Following Defines the Internal Rate of Return