I was hoping that someone could give me a more in depth explanation of what the IRR metric is actually telling an analyst who is working on a capital budgeting project. I understand the text book definition; (The discount rate that makes the NPV of all cash flows equal to zero). But how is this metric actually gauging the profitability of a project? If the IRR is simply telling an analyst the ROR that the firm will receive in order to break even on a project, how is this a measure of profitability? And shouldn’t the firm be looking to invest in projects that provide a return higher than the break-even point (IRR)? Also, why is IRR compared to the Cost of Capital in accept or reject decisions if the IRR is simply a break-even metric? Sorry for the long rant, but i’m really looking for an intuitive explanation.
A question to ponder: if the project doesn’t at least earn the WACC to pay off the bondholders and shareholders, does that make them happy or _ ANGRY _???
Fer crap’s sakes, it’s Friday night!!! Go out and have some fun!!! Save this stuff for later!!!
you need to earn at least that much to make it “even” for you. So it is a measure of profitability. If you do not make that much you lose… isn’t that making the project unprofitable?