Internal Rate of Return
The internal rate of return (IRR) is another tool that managers can
use in evaluating alternatives. It is defined as the discount rate, the
rate at which the NPV of an investment equals zero. Typically, when
the IRR of one alternative is greater than the expected return of an-
other, the one with the higher IRR should be undertaken.
What’s a reasonable rate of return for a business to expect on an
investment? Typically, it’s well above what it could get on a risk-free
investment, such as a Treasury bond. In many instances, companies
will set a hurdle rate: a minimal rate of return that all investments are
required to achieve. In ...