What does a higher IRR indicate about a project?

A higher internal rate of return (IRR) indicates that a project is expected to generate a higher return relative to its costs. The IRR represents the discount rate at which the net present value (NPV) of all cash flows from a project becomes zero. Therefore, a higher IRR suggests that the project is more efficient at converting investment costs into returns, making it an attractive opportunity for investors.

When comparing projects, those with a higher IRR are typically preferred because they promise greater profitability. Investors often have a required rate of return, and as long as the IRR exceeds this threshold, the project is seen as a viable investment. A higher IRR implies that the project's returns exceed its costs more significantly than projects with lower IRR values.

In contrast to this, while options discussing lower returns, lower risk, or guaranteed cash flow might seem relevant, they do not accurately capture the direct implications of a higher IRR. The IRR does not guarantee positive cash flows nor does it directly measure risk. Instead, it primarily reflects the expected return of the project in relation to the initial investment.