How is internal rate of return defined?

The internal rate of return (IRR) is a crucial financial metric that represents the yield rate, which effectively discounts all future cash flows generated by an investment back to a present value that equals the amount of the original investment. This means that IRR is the interest rate at which the net present value (NPV) of the cash flows received from an investment are balanced with the costs incurred to acquire that investment. In essence, it reflects the expected growth rate of an investment over time based on these projected cash flows, allowing investors to assess the profitability of the investment relative to its costs.

Understanding IRR provides valuable insights for decision-making in investment scenarios. By calculating the IRR, investors can compare different investment opportunities, taking into account the time value of money, since it shows the rate of return expected over the period the investment is held.

The other options do not capture the essence of IRR. For instance, total appreciation of a property focuses solely on the change in value over time rather than the overall yield linked to cash flow. Tax implications relate to the financial impact of taxes rather than the return rate of cash flows. Rental income alone does not encompass all potential cash flows of a real estate investment, such as appreciation, operating costs, or