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What is the Internal Rate of Return (IRR)?

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Question: What is the Internal Rate of Return (IRR)?

Options:

  1. The discount rate that makes NPV zero
  2. The rate of return on equity
  3. The average return on investment
  4. The cost of capital

Correct Answer: The discount rate that makes NPV zero

Solution: 

The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of a project equal to zero.

What is the Internal Rate of Return (IRR)?

Practice Questions

Q1
What is the Internal Rate of Return (IRR)?
  1. The discount rate that makes NPV zero
  2. The rate of return on equity
  3. The average return on investment
  4. The cost of capital

Questions & Step-by-Step Solutions

What is the Internal Rate of Return (IRR)?
  • Step 1: Understand that IRR is a financial term used to evaluate investments.
  • Step 2: Know that IRR is the rate at which the money you invest grows over time.
  • Step 3: Learn that IRR is the discount rate that makes the total value of future cash flows equal to the initial investment.
  • Step 4: Realize that when you calculate IRR, you want the Net Present Value (NPV) to be zero.
  • Step 5: Remember that a higher IRR means a more profitable investment.
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