What does a zero percent internal rate of return (IRR) imply?

A zero percent internal rate of return (IRR) indicates that the project's expected return is exactly equal to the cost of capital. This means the project is breaking even in terms of the return it generates relative to the investments made and the expected return required by investors. When the IRR is equal to the cost of capital, the net present value (NPV) of the project is zero. Hence, the project is not generating any profit but rather covering its costs; it neither adds value nor destroys it.

In this context, if the IRR was below zero, it would suggest that the project's costs exceed the benefits, while a positive IRR would mean the project is generating significant profits. The notion of the project being overvalued doesn't directly correlate with a zero percent IRR, as that could imply other factors at play in market valuation rather than just the return being equal to the cost of capital. Therefore, a zero percent IRR clearly reflects that the project's return is just meeting the minimum required return, making the first answer the most accurate representation of this financial metric.