Final answer:
Choose the project with the higher Internal Rate of Return (IRR) as it's expected to generate more profitability. Factors such as a firm's profit history and current economic interest rates also influence the attractiveness and risk of the investment. The IRR reflects the opportunity cost and the necessary risk premium.
Step-by-step explanation:
If your decision rule is to accept the project with the greater Internal Rate of Return (IRR), then you should choose the project that has the highest IRR compared to others being considered. The IRR is a measure of the profitability of potential investments. Essentially, it's the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. When you compare multiple projects, the one with the higher IRR would be considered more attractive since it's expected to generate more returns relative to its cost.
Furthermore, it's important to consider factors such as the firm's profit history and current economic interest rates. For example, if the borrower is a firm with a record of high profits, it is more likely to repay the loan, making the investment less risky and potentially more attractive. Conversely, if interest rates in the economy have risen, the attractiveness of a loan made at a time of relatively lower interest rates decreases, as you'd likely achieve better returns elsewhere.
Ultimately, the project with the greater IRR, assuming all other factors such as the level of risk are comparable, would be the one to choose. This aligns with identifying an investment's opportunity cost and incorporating a risk premium where necessary. If a financial investor believes a 15% interest rate is appropriate to value future payments, for example, any projects with an IRR above this rate would be particularly appealing.