The risk free rate of return is often used when comparing the merits of different investments using discounted cash flow calculations.
The risk free rate of return is generally taken to be the return available from long-term, AAA rated, government bonds.
Government bonds are taken to be risk free because, if governments lack sufficient money to redeem bonds or to make interest payments on them, they can either raise the money through taxation or print it. Long-term bonds are chosen in preference to short-term bonds because investors in short-term bonds have to reinvest their capital more frequently and may fail to secure the same interest rate when they reinvest their money.
Whether AAA government bonds are truely risk free, with zero probability of default, is debateable. All governments are susceptible to political pressures and therefore, at some point, may deem it more expedient to default on debt rather than increase taxation or print money.
AAA government bonds do, however, represent the closest approximation there is to a risk free investment.