The

rate of return that would

make the

present value of

future cash flows plus the

final market value of an

investment or

business opportunity equal the current

market price of the investment or opportunity; in other words, the rate of return at which the

net present value of the project is

zero. If the

internal rate of return exceeds the

cost of

financing the project, then the project is viable. The internal rate of return is also useful in

ranking competing investment

projects (the higher the internal rate of return, the better the project is), but there are some

limitations with this technique.

First, if cash flows

change from

negative or

positive, or vice versa, a unique internal rate of return cannot be calculated,

Second, in the case that competing projects are being considered, the internal rate of return criteria sometimes gives a different ranking than the net present value criteria. Thus, net present value is usually preferred over internal rate of return, since net present value is a specific

number and is usually easier to calculate.

**also called** dollar-weighted rate of return.