If the NPV is zero, the investment earns a rate of return equal to?

When the Net Present Value (NPV) of an investment is zero, it indicates that the investment is earning a rate of return that is exactly equal to the discount rate used in the NPV calculation. The discount rate is the rate of return that investors expect to earn on an investment given its risk profile; it essentially represents the opportunity cost of capital.

In practical terms, when NPV equals zero, it suggests that the present value of the cash inflows generated by the investment matches the present value of the cash outflows, which means that the investment is neither creating nor destroying value when compared to the next best alternative (as defined by the discount rate). Therefore, the investment's return aligns with that threshold necessary to justify investment, making it neither attractive nor unattractive relative to other possible investments.

This concept is central to financial decision-making, as investors aim to invest in projects that yield returns greater than the discount rate, thereby creating positive NPV.