How is the internal rate of return of a project calculated, and what must one look out for when using the internal rate of return rule?

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How is the internal rate of return of a project calculated, and what must one look out for when using the internal rate of return rule?



Answer: Instead of asking whether a project has a positive NPV, many businesses prefer to ask whether it offers a higher return than shareholders could expect to get by investing in the capital market. Return is usually defined as the discount rate that would result in a zero NPV. This is known as the INTERNAL RATE OF RETURN, or IRR. The project is attractive if the IRR exceeds the OPPORTUNITY COST OF CAPITAL.

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