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What is the internal rate of return (IRR) of a project, how is it calculated, and...

What is the internal rate of return (IRR) of a project, how is it calculated, and what is its decision rule?

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Internal Rate of Return (IRR) :IRR is the percentage discount rate used in capital investment appraisals which brings the cost of the project and its future cash flows into equality. At IRR , present value of cash inflow equals to present value of cash outflow. The IRR is to be obtained by hit and trial method to ascertain the discount rate at which , present value of cash inflow equals to present value of cash outflow.

The use of IRR , as criterion to accept capital investment decision involves comparision of IRR with the required rate of return known as cut off rate . If IRR is greater than the cut off rate , the project should be accepted. If IRR is less than the cut off rate, the project is rejected. If IRR is equal to the cut off rate , the firm is indifferent.

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