The discount rate that results in a net present value of \$0 is the:

• A. Internal Rate of Return (IRR)
• B. Future Value Rate
• C. Payback Period Rate
• D. Weighted Average Cost of Capital (WACC)

Answer: (A)

Verified step by step guidance

1. Understand the concept of the Internal Rate of Return (IRR): The IRR is the discount rate at which the net present value (NPV) of all cash flows (both inflows and outflows) from a project or investment equals zero. It is a key metric in capital budgeting.
2. Recall the formula for NPV: \( \text{NPV} = \sum_{t=1}^{n} \frac{C_t}{(1 + r)^t} - C_0 \), where \(C_t\) represents cash inflows, \(C_0\) is the initial investment, \(r\) is the discount rate, and \(t\) is the time period.
3. To find the IRR, set \( \text{NPV} = 0 \) in the NPV formula. This means solving the equation \( 0 = \sum_{t=1}^{n} \frac{C_t}{(1 + r)^t} - C_0 \) for \(r\).
4. Recognize that the IRR is not directly calculated using a simple formula. Instead, it is typically found through iterative methods, such as trial-and-error, interpolation, or using financial calculators or software tools.
5. Differentiate the IRR from other terms in the problem: The Future Value Rate refers to the growth of an investment over time, the Payback Period Rate measures the time required to recover the initial investment, and the Weighted Average Cost of Capital (WACC) is the average rate of return required by all investors in a company.