What does the Internal Rate of Return (IRR) compare to determine the viability of an investment?

The Internal Rate of Return (IRR) is a critical financial metric that measures the profitability of an investment by estimating the rate at which the net present value (NPV) of future cash flows equals zero. To determine the viability of an investment, the IRR is compared to the required rate of return.

The required rate of return is the minimum return that investors expect for providing capital to an investment, accounting for risks and opportunity costs. If the IRR exceeds the required rate of return, it indicates that the investment is likely to generate value and is thus considered viable. Conversely, if the IRR is below this threshold, the investment may not meet investor expectations and could be deemed unworthy.

Other options, while relevant in their contexts, do not serve the primary comparison that IRR addresses. The inflation rate influences cash flow values over time but is not a direct benchmark for investment viability in the context of IRR. The current market discount rate relates to how investments are valued but does not specifically equate to the required returns of individual investors. Lastly, while cash flow amounts are crucial for calculating IRR, they do not provide a comparative metric for evaluating investment risk or return potential directly. Thus, the most accurate point of comparison provided in