Final answer:
The discount rate that brings the net present value of an investment to zero is the internal rate of return (IRR). This rate is pivotal in determining an investment's profitability and is compared to a financial investor's required rate of return, which includes a risk premium.
Step-by-step explanation:
The discount rate that would return a net present value equal to zero is the internal rate of return (IRR). This rate is a critical financial metric used to evaluate the profitability of investments. The IRR is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Financial investors use the IRR to compare the profitability of investments and to determine whether they meet the minimum acceptable rate of return, also known as the hurdle rate.
When a financial investor is considering what future payments are worth in the present, they must choose an interest rate. This rate reflects the opportunity cost of investing financial capital and includes a risk premium if the investment is considered risky. For instance, if the financial investor decides that the appropriate rate to value future payments is 15%, then this would be compared to the investment's IRR to determine if the investment is viable.