Internal rate of return (IRR) is the expected rate of return on investment and the discount rate that makes the net present value of investment projects equal to zero.
merits and demerits
The advantage of internal rate of return method is that it can link the income of the project with its total investment, point out the rate of return of the project, and compare it with the industry benchmark investment rate of return, so as to determine whether the project is worth building. When the loan is used for construction, when the loan conditions (mainly interest rate) are not clear, the internal rate of return method can avoid the loan conditions and get the internal rate of return as the acceptable upper limit of the loan interest rate first.
However, IRR is a ratio, not an absolute value. The scheme with low internal rate of return may be worth building because of its large scale and larger net present value. Therefore, both internal rate of return and net present value must be considered when choosing the ratio of each scheme.