IRR will accept a venture if its IRR is higher than or equal to the minimum required rate of return which is usually the cost of finance also known as the cut off rate or hurdle rate, and in this case IRR will be the highest rate of interest a firm would be ready to pay to finance a project using borrowed funds and without being financially worse off by paying back the loan (the principal and accrued interest) out of the cash flows generated by that project. Thus, IRR is the break-even rate of borrowing from commercial banks.

 Advantages of IRR

      • It considers time value of money

      • It considers cash flows over the entire life of the project.

      • It is compatible with the maximisation of owner’s wealth because, if it is higher than the cost of finance, owners’ wealth will be maximised.

                                         Unlike the NPV method, it does not use the cost of finance to discount inflows and for this reason it will indicate a rate of return of interval to the project against which various ventures can be assessed as to their viability

Disadvantages of IRR

  • Difficult to use.

  • Expensive to use because it calls for trained manpower and may use computers especially where inflows are of large magnitude and extending beyond the normal limits.

  • It may give multiple results some involving positive IRR in which case it may be difficult to use in choosing which venture is more viable.