Choice "A" is correct. The internal rate of return is equal to the discount rate at which the net present value of the investment is equal to zero. The $225,660 present value of after-tax cash flows associated with the investment discounted at 10% is equal to the value of the investment. The internal rate of return is 10%.
Choice "d" is incorrect. The undiscounted return of the investment in the first year is not the internal rate of return. The internal rate of return is the rate that provides a zero net present value.
Choice "b" is incorrect. The ratio of the incremental difference between discounted and undiscounted after-tax cash flows is not the internal rate of return. The internal rate of return is the rate that provides a zero net present value.
Choice "c" is incorrect. The arithmetic average of the undiscounted annual returns of the investment is not internal rate of return. The internal rate of return is the rate that provides a zero net present value.