Internal rate of return is a discounted rate that makes NPV equal to zero. Internal rate of return simply define as IRR. IRR determines that if any project will be accept or reject. There have a certain condition on IRR that determines that the project will accept or not.
Let initial investment 100 dollar, after a one year expected to gain 130 dollar.
NPV= Negative value of initial investment + FV/(1+r)
= -100+130/(1+.08) Here, r is 8 percent
=20.37
Here, NPV is greater than zero
Project should accept.
Again let us calculate IRR,
IRR makes NPV is equal to zero.
NPV = -100 + 130/(1+R)
0 = -100 + 130/(1+R)
R = .30
30 percent
Hence, R is greater than r
Hence, project is accepted