6. Conclusions

The last sections have discussed potential pitfalls of the IRR rule. This extensive discussion of the IRR challenges should by no means hide the fact that in most investment situations, the IRR rule works perfectly well and leads to the same result as the NPV rule.

As long as we are dealing with fairly standard investment projects with initial cash outflows followed by a stream of cash inflows, there is little ambiguity in the interpretation of the IRR. If the IRR is larger than the cost of capital, we should accept the project, otherwise we should reject it.

The resulting investment criterion is easy to measure and easy to communicate. That's the main strength of the IRR, which is why we should always report it. Ideally, we report the IRR together with the NPV. This gives the decision maker direct insights into the project's value added in terms of dollars (NPV) and extra return (IRR) earned.