What is considered a good internal rate of return on investment?

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The IRR is considered good if it is higher than the weighted average cost of capital used to finance the project, known as WACC.

If the IRR value of a project is higher than the WACC, then it can be considered successful and recommended for implementation.

If the IRR is lower than the WACC, the usa mobile phone numbers database project should be considered ineffective.

WACC shows how much profit a company must earn to cover the cost of raising capital from shareholders and creditors.

What is considered a good internal rate of return on investment?

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Let's look at how to calculate WACC using an example.

Let us assume that the capital structure of the organization includes the following elements:

equity capital (ordinary shares) — 50 million rubles;

preferred shares - 10 million rubles (these shares provide the holder with the right to a stable income, priority receipt of dividend payments, and also the first return of investment funds in the event of liquidation of the company);

long-term loan - 20 million rubles;

short-term loan - 10 million rubles.

Cost of funding sources:

equity capital (common shares) - 15%;

preferred shares - 10%;

long-term loan - 12%;

short-term loan - 15%.

The capital structure and the share of each source of financing is as follows:

equity capital (common shares) is 0.5;

preferred shares have a share of 0.1;

long-term lending takes 0.2;

short-term loans amount to 0.1.

The interest rate an organization pays on borrowed funds, such as bank loans or bonds. This indicator reflects the company's costs in meeting its debt obligations.

The ratio of different sources of financing in the capital structure of the enterprise, including the share of equity capital, the share of borrowed capital and the share of alternative sources. This shows the percentage distribution of each of these sources in relation to the total investment.

Weighted average cost of capital
Now let's move on to calculating the weighted average cost of capital. The following formula will help us with this:

WACC = (share of equity * cost of equity) + (share of debt * cost of debt)

Let's count:

WACC = (0.5 × 15%) + (0.1 × 10%) + (0.2 × 12%) + (0.1 × 15%) = 8%

In the case under consideration, the average cost of capital of the enterprise is 8%.

A level below 8% is considered good. A value from 8% to 12% is considered satisfactory. If the value exceeds 12%, it is considered a bad indicator.