Final answer:
You should invest in projects with an IRR that exceeds the cost of capital, which considers both the expected rate of return and associated investment risks.
Step-by-step explanation:
You should invest in any project that has an Internal Rate of Return (IRR) equal to or exceeding the cost of capital. The expected rate of return is what an investment is projected to return in the form of interest, capital gains, or increased profitability. However, the actual choice of investment will also consider the risk associated with the investment, which includes uncertainties like default risk and interest rate risk. A prudent investor seeks an IRR that not only meets but exceeds the cost of capital to justify the risk taken and to aim for profitability beyond the minimum threshold. The cost of capital effectively serves as a benchmark for the investors to evaluate potential returns relative to risks and to compare alternative investment opportunities.