9.4 Internal Rate of Return
The most popular alternative to the NPV for capital budgeting decisions is the internal rate of return (IRR). This is the discount rate that produces a zero NPV, or the specific discount rate at which the present value of the cost (the investment or cash outflows) equals the present value of the future benefits (cash inflows).
The IRR rule prescribes that we should accept those investments in which the internal rate of return exceeds the required rate of return. If the IRR is less than the required rate of return, we should reject the project. The required rate of return on a project is the appropriate cost of capital for the project, a topic we visit in Chapter 11. For now, we provide the required rate of return for ...
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