Section outline

  • This section introduces the "little brother" of the NPV, the Internal Rate of Return (IRR). The IRR indicates the return that investors can expect to earn when investing in a project. For general investment projects, the IRR rule states that we should invest if the IRR exceeds the cost of capital. We show that IRR and NPV very often lead to identical investment decisions and that the main advantage of IRR is that it is easy to communicate and understand. Yet there are some very important implementation issues that we need to keep in mind when working with IRRs instead of NPVs.