The internal rate of return is
A) the discount rate that makes the NPV positive.
B) the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
C) the discount rate that makes NPV negative and the PI greater than one.
D) the rate of return that makes the NPV positive.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows, which is equivalent to setting the net present value (NPV) of the investment equal to zero. Therefore, option B is the correct answer. Option A is incorrect because it implies a positive NPV, but not necessarily an IRR. Option C is incorrect because it implies a negative NPV, but a PI greater than one does not necessarily imply a specific IRR. Option D is incorrect because it implies that there is only one rate of return that makes the NPV positive, but in fact, there may be multiple rates that achieve this.

The Internal Rate of Return Is