In: Finance
Critique Internal Rate of Return and compare to Return on Assets, Investment, Capital, and defend best practice in assessing overall financial performance.
The internal rate of return (IRR) calculates the minimum return that is required to be earned in a project so that it does not become non-profitable. In other words, internal rate of return is the minimum possible discount rate for the project and any discount rate below the IRR will make the project unattractive.
When we compare the IRR to return on assets and return on investment capital, the Return on assets and return on investment are better indicators of financial performance that the IRR. The IRR just confirms if the project is profitable or not, it does not comment on what the degree of profitability. However, the return on assets and the return on invested capital actually measure the return that is obtained by deploying the assets and the capital. So in conclusion, IRR is an indicator or financial performance or non-performance, whereas Return on assets and investment capital are measurements of financial performance.