The internal rate of return is defined as the:
A) maximum rate of return a firm expects to earn on a project.
B) rate of return a project will generate if the project is financed solely with internal funds.
C) discount rate that equates the net cash inflows of a project to zero.
D) discount rate which causes the net present value of a project to equal zero.
E) discount rate that causes the profitability index for a project to equal zero.

Question

The internal rate of return is defined as the: 
A) maximum rate of return a firm expects to earn on a project. 
B) rate of return a project will generate if the project is financed solely with internal funds. 
C) discount rate that equates the net cash inflows of a project to zero. 
D) discount rate which causes the net present value of a project to equal zero. 
E) discount rate that causes the profitability index for a project to equal zero.

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value of a project equal to zero. This means that the present value of the cash inflows from the project is equal to the present value of the cash outflows. A project with an IRR greater than the required rate of return is considered to be profitable, while a project with an IRR less than the required rate of return is considered unprofitable. Therefore, option D is the correct choice as it describes the definition of IRR.

The Internal Rate of Return Is Defined as The