What Makes an Investment Acceptable: IRR and Required Return

The correct answer is 'B. exceeds the required return.'

Here's why:

• Internal Rate of Return (IRR): The IRR is the discount rate that makes the net present value (NPV) of all cash flows from a project equal to zero. In simpler terms, it's the rate of return an investment is expected to yield.

• Required Return: This is the minimum rate of return an investor expects to earn on an investment, taking into account the risk involved.

For an investment to be considered acceptable, its IRR should exceed the required return. This indicates that the potential return on the investment is higher than the minimum return the investor is willing to accept.

Why other options are incorrect:

• A. is less than the required return: If the IRR is less than the required return, the investment is not expected to generate enough return to compensate for the risk, making it unattractive.
• C. is exactly equal to zero: An IRR of zero means the investment is not generating any return, making it a poor investment choice.
• D. is exactly equal to its net present value (NPV): IRR and NPV are related concepts, but they are not equal to each other. NPV is the present value of all cash flows, while IRR is the discount rate that makes the NPV equal to zero.
• E. is exactly equal to 100%: A 100% IRR is possible, but it's extremely high and unlikely in most real-world investments. It would require a very significant return on the initial investment.