What is the internal rate of return (IRR)?

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a project equal to zero. This means that when you apply the IRR as the discount rate to the expected cash inflows and outflows associated with a project, the total value of those cash flows will balance out to a net present value of zero.

This characteristic of IRR allows investors and financial analysts to evaluate the profitability of an investment or project. If the IRR exceeds the required return or hurdle rate, it indicates that the project is expected to generate profit, making it an attractive option for investment. Thus, IRR serves as a critical measure in capital budgeting and investment decision-making.

The other choices do not accurately define IRR. The annualized return rate of an investment, while related to performance measurement, does not equate to the calculation of IRR. The interest rate on corporate bonds and the yield on preferred stock are specific to those financial instruments and do not pertain to the calculation of the internal rate of return for projects or investments in general.