Final answer:
A project should be invested in if its Internal Rate of Return (IRR) is equal to or exceeds the cost of capital, as this indicates the project is expected to provide satisfactory returns to investors.
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 cost of capital represents the minimum return that investors expect for providing capital to the company, hence, when the IRR of a project exceeds the cost of capital, it suggests that the project will generate returns in excess of the minimum expected by investors. This makes it an attractive investment.
IRR can be compared to the cost of capital to determine whether to proceed with the project:
- If IRR is above the cost of capital, the project is expected to generate value.
- If IRR is below the cost of capital, the project might not be worth the investment.
On the other hand, factors like the discount rate, payback period, and break-even point are also important in investment decisions, but in the context of whether to accept or reject a project based on IRR, the cost of capital is the benchmark.