The internal rate of return is the rate at which a project's net present value is zero. Since the IRR is a rate and the NPV is a monetary amount, the two are not comparable.
A positive profitability index indicates that the project's profitability is higher than its cost of capital. Therefore, the internal rate of return of the project must be greater than the cost of capital.
The profitability index for an investment project is its discounted annual net cash inflows divided by its initial cash investment. If a project profitability index is greater than 1.00, we know that its discounted annual net cash inflows are greater than its initial cash investment. Since the net present value is the monetary gain (loss) of the project's cumulative net cash flows, the net present value of a project with a P.I. of greater than 1.00 must be positive.
The internal rate of return of a project is the discount rate at which a project's net present value is zero. It is not calculated as the profitability index ? 1.
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