What is a good internal rate of return for a project?
John Hall
Updated on February 09, 2026
If you were basing your decision on IRR, you might favor the 20% IRR project. But that would be a mistake. You’re better off getting an IRR of 13% for 10 years than 20% for one year if your corporate hurdle rate is 10% during that period.
How do you calculate the internal rate of return for a project?
Internal rate of return is a discount rate that is used in project analysis or capital budgeting that makes the net present value (NPV) of future cash flows exactly zero….How to Calculate Internal Rate of Return
- C = Cash Flow at time t.
- IRR = discount rate/internal rate of return expressed as a decimal.
- t = time period.
What is the rule for IRR?
The internal rate of return (IRR) rule states that a project or investment should be pursued if its IRR is greater than the minimum required rate of return, also known as the hurdle rate. The IRR Rule helps companies decide whether or not to proceed with a project.
Why IRR is a bad metric?
Ludovic Phalippou famously said in a paper published almost a decade ago that “IRR is probably the worst performance metric one could use in an investment context,” partly because it “can be readily inflated.” Phalippou also mentioned that IRR “exaggerates the variation across funds, exaggerates the performance of the …
Which is better NPV or IRR?
In order for the IRR to be considered a valid way to evaluate a project, it must be compared to a discount rate. If a discount rate is not known, or cannot be applied to a specific project for whatever reason, the IRR is of limited value. In cases like this, the NPV method is superior.
What is IRR and how is it calculated?
It is calculated by taking the difference between the current or expected future value and the original beginning value, divided by the original value and multiplied by 100.
When to reject a project due to internal 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 can be pursued. Conversely, if the IRR on a project or investment is lower than the cost of capital, then the best course of action may be to reject it.
What do you need to know about internal rate of return?
IRR Conclusion 1 Internal Rate of Return is a metric used to indicate the rate of growth a project can be expected to generate. 2 The IRR is presented as a percentage. 3 The IRR helps in deciding whether or not a project is worth investing in. 4 The IRR is generally the minimum accepted return on a project or investment. Weitere Artikel…
How are Project IRR and equity IRR calculated?
Calculating Equity IRR Calculation of the internal rate of return considering the cash flows net of financing gives us the equity IRR. It means the project is funded by a mix of debt and equity. If the project is fully funded by equity, the project IRR and Equity IRR will the same.
Why are higher rate of return projects preferred?
Other factors aside, higher IRR projects are usually preferred, as we expect those to be more profitable for the business. The definition given for IRR is the rate of return at which the present value of the future cash flows is equal to the current value of all costs associated with the investment.
