If the internal rate of return (IRR) of a project is 12% and the required return is 10%, should the project be accepted?

• A. Yes, IRR exceeds required return; accept
• B. No, IRR does not exceed required return; reject
• C. The decision cannot be made with this information
• D. It depends on the initial investment amount

Answer: (A)

When evaluating a project with the internal rate of return, you compare the IRR to your required return (hurdle rate). If the IRR exceeds the required return, the project adds value and should be accepted. This is because the IRR is the discount rate that makes the project’s net present value zero; a rate higher than what you require means the cash inflows are worth more than the cost of capital, yielding a positive NPV. Here, the IRR is 12% and the required return is 10%, so the project should be accepted. The initial investment amount isn’t needed for this decision—what matters is that the project’s profitability (12%) beats the threshold (10%). If the IRR were below 10%, you’d reject; if it were exactly 10%, you’d be indifferent.