Internal Rate of Return Rule

The Internal Rate of Return (IRR) rule is a financial method used to evaluate investments. It calculates the annual percentage rate at which the present value of expected cash inflows equals the initial investment cost. If the IRR is higher than the required return or cost of capital, the investment is typically considered worthwhile because it’s expected to generate a good return. Conversely, if the IRR is below the threshold, the investment may not be justified. Essentially, IRR helps compare different projects and decide which ones are likely to be most profitable based on their projected cash flows.