What does the internal rate of return (IRR) indicate?

The internal rate of return (IRR) is a critical concept in project management and financial analysis, specifically when evaluating the profitability of an investment or project. It is defined as the discount rate that results in a net present value (NPV) of zero when applied to a series of cash flows associated with a project. When the IRR is calculated, it helps decision-makers determine the maximum rate of return that an investment can generate in relation to its costs.

If the IRR exceeds the company's required rate of return or cost of capital, the project is considered attractive for investment. Conversely, if the IRR is below this threshold, it implies that the investment may not meet the desired financial criteria.

The other options do not accurately describe IRR. While one option refers to the highest discount rate for a project, this does not capture the essence of IRR, which specifically is the rate that makes NPV zero. The average cost of capital does not reflect IRR either, as it represents the overall cost of financing for a company, rather than the profitability of a specific project. Finally, the future value of cash flows represents the amount those cash flows will grow to at a specific interest rate over time, which is unrelated to the calculation of