what is the internal rate of return irr rule 
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 investopedia eliana rodgersunderstanding the internal rate of return irr rulethe 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 cash the project generates for the company so if the project looks profitable management should proceed with it on the other hand if the irr is lower than the cost of capital the rule suggests that the best course of action is to forego the project or investment investors and firms use the irr rule to evaluate projects in capital budgeting but it may not always be rigidly enforced generally the higher the irr the better however a company may prefer a project with a lower irr because it has other intangible benefits such as contributing to a bigger strategic plan or impeding competition a company may also prefer a larger project with a lower irr to a much smaller project with a higher rate because of the higher cash flows generated by the larger project advantages and disadvantages of the irr ruleanyone who uses the internal rate of return rule often finds it easy to determine and understand companies and investors can easily calculate it and compare it to other projects and investments that are under consideration another advantage of using this rule is that it helps companies and investors consider the time value of money tvm this is a concept that states that an amount of money will be worth more now than the same sum in the future as such the future cash flow that results from an investment is discounted to its present value under the irr rule the irr rule doesn t take the actual dollar value of the project or any anomalies in cash flows into account if there are any irregular or uncommon forms of cash flow the rule shouldn t be applied if it is it may result in flawed findings another key disadvantage of the irr rule is that it is flawed in its assumption of any reinvestments made from positive cash flow notably that they are made at the same internal rate of return easy to calculate and understandallows for comparison between other projects and investmentstakes time value of money into account