![]() If the IRR is lower than the cost of capital, the project should be rejected. In a hypothetical situation, when IRR is the only criterion for making a decision, a project is considered a good investment if its IRR is greater than the hurdle rate. When estimating a single project, finance analysts typically compare the IRR to a company's weighted average cost of capital or hurdle rate, which is the minimum rate of return on an investment that the company can accept. The general principle is as simple as this: the higher the internal rate of return, the more attractive the project is. In capital budgeting, IRR is widely used to evaluate the profitability of a prospective investment and rank multiple projects. The term "internal" indicates that IRR takes into account only internal factors external factors such as inflation, the cost of capital and various financial risks are excluded from calculation. Technically, IRR is the discount rate that makes the net present value of all cash flows (both inflows and outflows) from a certain investment equal to zero. Sometimes, it is also referred to as discounted cash flow rate of return or economic rate of return. The internal rate of return (IRR) is a commonly used metric to estimate the profitability of a potential investment. ![]()
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