IRR Rule



A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of return (IRR) on a project or investment is greater than the minimum required rate of return – the cost of capital – then the decision would generally be to go ahead with it. Conversely, if the IRR on a project or investment is lower than the cost of capital, then the best course of action may be to reject it.


The higher the IRR on a project and the greater the amount by which it exceeds the cost of capital, the higher the net cash flows to the investor. In general terms, a company that has to choose one, among several similar projects with equivalent degrees of risk, may go with the one that provides the highest IRR.

The IRR rule is one among a number of rules used to evaluate projects in capital budgeting. However, it may not always be rigidly enforced. For example, a company may prefer a project with a lower IRR over one with a higher IRR because the former provides other intangible benefits such as being part of a bigger strategic plan or impeding competition. A company may also prefer a larger project with a lower IRR to a much smaller project with a higher IRR, because of the higher cash flows generated by the larger project.

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  2. Internal Rate Of Return - IRR

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  3. Net Present Value - NPV

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  4. Hurdle Rate

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  5. Modified Internal Rate Of Return ...

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  6. Capital Budgeting

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  1. What's the difference between net present value and internal rate of return? How ...

    Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new ... Read Full Answer >>
  2. Which is a better measure for capital budgeting, IRR or NPV?

    In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >>
  3. Do you discount working capital in net present value (NPV)?

    Net present value (NPV) calculations should include the discounted value of changes in working capital. This treatment of ... Read Full Answer >>
  4. How is working capital different from fixed capital?

    There are several key differences between working capital and fixed capital. Most importantly, these two forms of capital ... Read Full Answer >>
  5. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  6. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>

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