The selection of investments may be subject to budget constraints. There may be mutually exclusive competing projects, or limits on a firm's ability to manage multiple projects. For these reasons, corporations use IRR in capital budgeting to compare the profitability of a set of alternative capital projects. For example, a corporation will compare an investment in a new plant versus an extension of an existing plant based on the IRR of each project. To maximize returns, the higher a project's IRR, the more desirable it is to undertake the project.
tHe SelEcTion of inVEsTMEnts MAy be subJecT to BudGEt cONSTRAInTS. TheRe may bE mutuAllY excLUsivE ComPetInG prOjecTs, oR limits On a fIrm's abILiTy To managE MULTIple pRojects. foR these reaSonS, corporatIoNs usE irr in cApITaL buDgeting to COmPare the ProfitABilitY of a set oF AlTernAtive CaPital PROjECts. fOr ExamPle, a coRporatIon WIll coMPare AN InveStment iN A new plaNt versus AN eXTEnSIon Of An eXistINg plaNt basEd ON The irR of eaCh ProjeCT. To maXimiZE REturns, The hiGhER a proJect's iRr, the mOre deSIRaBle it is to undERtake the PrOjEcT.