What is the IRR rule?
Understand the Problem
The question is asking for an explanation of the Internal Rate of Return (IRR) rule, which is a finance concept used to assess the profitability of investments. It indicates the discount rate at which the net present value of the cash flows from an investment would be zero.
Answer
The IRR rule evaluates projects based on whether the IRR exceeds the minimum required rate of return.
The IRR rule states that if the internal rate of return on a project or investment is greater than the minimum required rate of return, typically the cost of capital, then the project or investment should be pursued.
Answer for screen readers
The IRR rule states that if the internal rate of return on a project or investment is greater than the minimum required rate of return, typically the cost of capital, then the project or investment should be pursued.
More Information
The IRR rule is crucial for capital budgeting decisions, ensuring that investments generate returns higher than the cost of capital.
Tips
A common mistake is confusing IRR with the actual percentage return you will get; it’s the discount rate that makes NPV zero.
Sources
- Internal Rate of Return (IRR) Rule: Definition, Formula & Example - investopedia.com
- IRR Rule for Capital Budgeting: Interpretation and Implications - linkedin.com
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