Internal Rate of Return (IRR) Rule: Definition and Example [Video]

The internal rate of return (IRR) rule states that a project or investment should be pursued if its IRR exceeds the minimum required rate of return or the hurdle rate. Its root lies in the internal rate of return, which is the return required to break even or net present value (NPV). This rule is an important tool for companies and investors if they want to determine whether to take on a certain project or investment or to compare it to others they may be considering.

The IRR rule is essentially a guideline for deciding whether to proceed with a project or investment. Mathematically, IRR is the rate that would result in the net present value of future cash flows equaling exactly zero.

The higher the projected IRR on a project—and the greater the amount it exceeds the cost of capital—the more net cashthe project generates for the company. So, if …