So what's the IRR for this project?

Well we write our NPV formula,

we set our NPV equal to 0, and then we solve for the one discount rate such that

when we discount all of our free cash flows, we get an NPV of 0.

If we do that,

we find that the IRR

on this project

is 43.7%.

Well, is that good?

Is it bad?

Before getting there,

I just want to mention, typically we're going to need to solve this numerically,

unless you've figured out some amazing way to solve higher order polynomials.

You can use the IRR function in Excel.

I think you can use the use GOAL SEEK in Excel.

You can try trial and error, though that's really inefficient.

If you're using another software program or a financial calculator,

you can do this as well.

All right. So what do we do with this 43.7% IRR?

Well, we're going to compare it to our cost of capital, our hurdle rate.

And what we're going to do is we're doing to undertake the project

because the IRR is greater than the hurdle rate.

Intuitively, it makes sense.

And this is one of those cases where intuition actually works.

It costs us 12% to raise money in the capital markets,

to fund our investments, to create value.

If this project generates a return of 43.7%,

that's substantially larger than what it cost us to raise the funds.

That sounds good.

That makes sense.

And so what the IRR Rule says is accept all projects whose IRR is greater than R,

and reject all projects whose IRR is less than R, where R is our hurdle rate.

Hurdle rate cost of capital our discount rate.