The Internal Rate of Return has been calculated for an option in a Business Case. Which ONE of the following statements is true?

The Internal Rate of Return (IRR) is a fundamental metric in financial analysis and capital budgeting. By definition, the IRR is the specific discount rate at which the Net Present Value (NPV) of a series of cash flows (both inflows and outflows) equals zero. When a business case states that the IRR has been calculated, it means this break-even discount rate has been identified. Therefore, the statement that the Net Present Value is zero is inherently true at the point of the IRR. This rate is then compared to a company's required rate of return or cost of capital to decide whether to accept or reject the project.

A. The Net Present Value is not known.

Incorrect. The NPV is explicitly known to be zero at the IRR, as this is the core definition of the IRR calculation.

B. The DCF Rate is not known.

Incorrect. The IRR is the specific Discounted Cash Flow (DCF) rate that makes the project's NPV equal to zero.

D. The DCF Rate is Zero.

Incorrect. The IRR is the calculated DCF rate, which is a percentage representing the project's return; it is rarely, if ever, zero.

1. Brealey

R. A.

Myers

S. C.

& Allen

F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education. In Chapter 5

Section 5-2

"The Internal Rate of Return Rule

" the text states

"The internal rate of return (IRR) is defined as the rate of discount that makes NPV = 0."

2. Massachusetts Institute of Technology. (2009). 15.401 Finance Theory I

Fall 2008. MIT OpenCourseWare. In "Lecture 3: The NPV Rule and its Competitors

" the lecture notes define IRR as "the discount rate that sets NPV to zero."

3. Berk

J.

& DeMarzo

P. (2017). Corporate Finance (4th ed.). Pearson. In Chapter 7

Section 7.3

"The Internal Rate of Return Rule

" the IRR is defined as "the interest rate that sets the net present value of the cash flows equal to zero."