Internal Rate of Return (IRR) for IT Investments

IRR focuses only on the cash flows of the project and solves the NPV equation for the rate that will yield an NPV equal to zero.

Decision Rule:
  • Compare the cost of capital of the organization against the IRR of the project or investment.
  • If the IRR is higher, then the project can be approved.

  • Any project with a discount rate less than the IRR would yield a positive NPV.
  • The higher the discount rate the more the cash flows will be discounted resulting in a lower NPV of the project.
  • The company will approve any project or investment where the IRR is higher than the cost of capital as the NPV will be greater than zero.

  • Benefits:
  • takes into account the time value of money by considering the cash flows over the lifetime of a project
  • simple and straightforward
  • has an intuitive appeal.
  • widely adopted
  • does not require establishing the discount rate
  • can be used with NPV analyses