Irr

Kenneth Waring

Help, having problems with understanding Internal Rate of Return... I get that the this is the discount rate that gives an NPV of 0...what i don't understand is when a company should recommed a project on basis of the IRR???:001_unsure:

SandyHood

A company will have a discount rate it applies when assessing the viability of projects. This is sometimes called the hurdle rate. If a project has an IRR that is more than the required rate the project should be recommended.

It is a bit like a cabbie setting up in business, he can borrow at 8% to get started and has worked out that his business will return an internal rate of return of 15%.
So his return rate is greater than the cost (rate) of the capital needed.

Kenneth Waring

Hi, thanks for the input... just to finally clarify this and get it into my head... When you say his rate of return is greater you mean that the 8% is greater than the IRR of 15%...

SandyHood

His return is 15% (The IRR)
The cost of his capital was 8% (also called PV rate or discount rate)

So he was getting 7% more than it cost him

The IRR must be more than the PV rate for a YES