What Is the Difference Between WACC and IRR?
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IRR is a valuation metric in which the net present value (NPV) of a stream of cash flows is equal to zero.
Commonly, the IRR is used by companies to analyze and decide on capital projects.
The higher the IRR the better the expected performance of the project and the more return the project can bring to the company.
WACC is the average after-tax cost of a company’s capital sources and a measure of the interest return a company pays out for its financing. It is better for the company when the WACC is lower, as it minimizes its financing costs.
IRR & WACC
Companies want the IRR of any internal analysis to be greater than the WACC in order to cover the financing.
The primary difference between WACC and IRR is that where WACC is the expected average future costs of funds (from both debt and equity sources), IRR is an investment analysis technique used by companies to decide if a project should be undertaken.
In general, the IRR method indicates that a project whose IRR is greater than or equal to the firm’s cost of capital should be accepted, and a project whose IRR is less than the firm’s cost of capital should be rejected.
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