Internal rate of return is defined as

• A. The discount rate that makes the total present value of benefits equal to costs
• B. The rate that maximizes the present value of benefits
• C. The rate that minimizes costs
• D. The discount rate that makes the net present value equal to zero

Answer: (D)

Internal rate of return is the discount rate that makes the net present value of all project cash flows equal to zero. In other words, if you discount every cash flow—initial investment (negative) and all subsequent benefits (positive)—at this rate, their present values balance out exactly. That rate is the break-even return the project must earn.

This concept matters because the IRR tells you the rate of return the project would generate, independent of any outside discount rate. If the IRR exceeds your required return or cost of capital, the project typically has a positive NPV and is attractive; if it’s below, the NPV would be negative.

The other ideas aren’t correct definitions: the IRR isn’t the rate that maximizes the present value of benefits, and it isn’t the rate that minimizes costs. Saying PV of benefits equals PV of costs is essentially describing NPV = 0, which is the same idea, but the standard definition is specifically the rate that makes the net present value of all cash flows equal to zero.