Rather than selecting a particular discount rate for the
present value analysis,
various rates can be tried until the discounted present value of the stream of benefits are exactly offset
by the discounted stream of costs. Hence, a given project is economically
worthwhile if its internal rate of
return exceeds the cost of borrowing funds. Comparing alternative projects, the one with the
highest internal rate of return is the best alternative.
Internal rate of
return is indifferent to
the size of the alternatives
or the placement of negative effects, but it tends to be more abstract than either net present value or B/C ratio.