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Describe the internal rate of return (IRR) as a method for deciding the desirability of a...

Describe the internal rate of return (IRR) as a method for deciding the desirability of a capital budgeting project. What is the acceptance benchmark when using IRR?

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Answer #1

The internal rate of return (IRR) is a method where a discount rate is brought up which makes its net present value drive to zero. Under the IRR, under certain condition to be satisfied, we determine a discount rate which discount the future value of the future cash returns equal to the initial investment or to say which makes net present value equal to zero.

Under the IRR, the acceptance benchmark will be the higher the IRR, more attractive will be the project.

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