Chapter 18: Rules, Rules Everywhere: Government and Managerial Decision-Making

Chapter 16: Using Capital Budgeting to Prepare for the Future

The equation is solved for r *, which represents the internal rate of return.

If the project’s internal rate of return exceeds the cost of capital, the firm should undertake the project. This is similar to the situation described earlier in Figure 16-1.

The solution for the internal rate of return when done by hand is typically a laborious trial-and-error process. However, computers can be used to quickly solve this type of problem.