Project Selection – Internal Rate of Return

internal rate of return

Definition

Internal rate of return (IRR) is the interest rate at which the cash inflow and cash outflow of the project equals zero.

You don’t have to understand that!

Sample Question

There are three projects for you to choose from: Project A has an internal rate of return of 15%, Project B 20% while Project C -20%. Based on the information provided, which is the best project?

A. Project A
B. Project B
C. Project C
D. Not enough information provided

Solution: B

Higher the better

The larger the IRR, the more favorable the project financially is to the organization.

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