What factor does the investor use to make decisions with the IRR?

The opportunity cost of capital is a critical component that investors consider when evaluating the Internal Rate of Return (IRR). This concept reflects the returns that investors forgo by choosing one investment over another. In the context of IRR, it serves as a benchmark or hurdle rate that helps investors determine whether a particular investment is worthwhile. If the IRR exceeds the opportunity cost of capital, it indicates that the investment is expected to generate returns greater than what could be achieved through alternative investments of similar risk, making it an attractive option.

The advantage of using the opportunity cost of capital is that it helps investors compare the potential profitability of multiple investment opportunities. By considering the IRR in relation to this cost, investors can make informed decisions about where to allocate their resources for the best potential financial outcome. This method ultimately supports a strategic approach to investment that prioritizes maximizing returns based on relative risks and rewards.