Final answer:
The IRR benchmark is the Required rate of return, providing a minimum expectation for an investment considering various factors such as risk.
Step-by-step explanation:
The IRR (Internal Rate of Return) benchmark against which a project's IRR is compared is the Required rate of return. The IRR is a key metric used in capital budgeting to estimate the profitability of potential investments. The required rate of return is the minimum return an investor expects to achieve by investing in a project, taking into account various factors such as opportunity cost and risk premiums.
The expected rate of return indicates the profitability that an investor anticipates from an investment and is usually averaged over a period of time. Risk is associated with the potential deviation from the expected rate of return and includes types such as default risk and interest rate risk. The actual rate of return, on the other hand, is the total return realized from an investment, including both capital gains and interest.
Therefore, when evaluating the profitability of an investment using the IRR method, the required rate of return acts as a benchmark to determine whether an investment is worth pursuing.