What is difference between IRR and Cost of Capital?

Answer 1

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of an investment equal to zero. It is a measure of the profitability of an investment, expressed as a percentage.

The Cost of Capital is the minimum rate of return that a company must earn on its investments in order to satisfy its investors. It is a weighted average of the costs of debt and equity capital.

The main difference between IRR and cost of capital is that IRR is a measure of the profitability of an individual investment, while cost of capital is a measure of the overall cost of financing for a company.

Another difference is that IRR is calculated using the time value of money, while cost of capital is not. This means that IRR takes into account the fact that money received today is worth more than money received in the future.

In general, a project should be accepted if its IRR is greater than its cost of capital. This is because the project will generate a return that is greater than the minimum return that the company's investors require.