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    gentleman2222's Avatar
    gentleman2222 Posts: 9, Reputation: 1
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    #1

    Aug 28, 2018, 05:03 PM
    Is this paragraph on Internal Rate of Return incorrect?
    I came across this paragraph on Internal Rate of Return (IRR):


    "IRR, on the other hand, computes a breakeven rate of return. At any discount rate below the IRR, an
    investment would result in a positive NPV (and should be made). If the appropriate discount rate is
    above the IRR, then the investment will result in a negative NPV (and should be avoided). It's the
    breakeven discount rate - the rate at which the value of cash outflows equals the value of the cash inflows"


    Correct me if I mistaken, but can't IRR be a sort of "hurdle rate" such that if your IRR for a project exceeds
    The hurdle rate, then you *should* invest in the project. And if the IRR for a project is less than your
    Hurdle rate, you should *not* invest the project? Or is the paragraph correct?
    ebaines's Avatar
    ebaines Posts: 12,130, Reputation: 1307
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    #2

    Aug 30, 2018, 12:40 PM
    The paragraph is correct, but poorly worded. IRR is the discount rate that would have to be applied to a project's cash flows to result in $0 net present value. The better a project is, the higher the discount would have to be to result in $0 NPV. So high IRR is a good thing. The "hurdle rate" you mention is typically the average cost of capital for the corporation, and is calculated based on a mix of the rate of return that investors expect and the cost of borrowing cash. So you are also correct: if IRR is greater than the hurdle rate (i.e. cost of capital) the project makes financial sense.

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