IRR is the estimated annual return an investment will generate based on its forecasted annual cash flows. However, in practical terms a company’s capital constraints limit investments to projects with the highest NPV whose cost cash flows, or initial cash investment, do not exceed the company’s capital. This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost , i. Every periodically repeated income is capitalised by calculating it on the average rate of interest, as an income which would be realised by a capital at this rate of interest. Solve each of the 10 formulas. We should be indifferent in the decision whether to accept or reject the project. You can use internal rate of return, or IRR, to help you make such investment decisions.