When analyzing two
investments, one more
expensive than the other, the
internal rate of return on the difference (increment) in their prices; that is, a measurement of the extra potential
return of the more expensive investment. An internal rate of return is an estimate for the potential
yield on an investment; calculating the incremental internal rate of return is a tool to help an investor decide whether the added
risk of increased expenditure is worth the potential reward. Generally, if the incremental internal rate of return is higher than the minimum acceptable
rate of return, the more expensive investment is considered the better one.