The IRR decision rule, as you might recall,
says accept all projects for which the IRR is greater than R.
Reject all projects for which the IRR is
less than R, where R is our hurdle rate,
or opportunity cost of capital.
And the intuition was simple.
If it's costing us R percent to raise money to fund investment,
that investment should return something at least as big, if not greater, than R.
Preferably greater.
Now, I'm going to spend some time here talking about IRR,
a little bit of motivation here,
because rates of return are really popular measures used for making decisions.
Remember back to the survey evidence,
internal rate of return was the most popular decision criteria used by CFOs.
It just edged out NPV.
And likewise,
for PE firms, private equity firms, internal rate of return is by far
the dominant decision criterion used for evaluating investments.
So it's really important to understand this criterion.