What does a higher IRR compared to the required rate of return signify?

A higher Internal Rate of Return (IRR) compared to the required rate of return indicates that the project is expected to generate a return that exceeds the minimum return threshold set by investors or the capital cost. This means that the project has the potential to add value to the firm by providing returns above what is necessary to compensate for the risk of the investment.

When the IRR is greater than the required rate of return, it signals that the earnings from the project will be sufficient to cover its costs and provide additional profit. As a result, the company would be better off accepting the project, as it promises a positive net present value (NPV), leading to an increase in shareholder wealth. This investment aligns with the goal of maximizing the firm's value, which supports the rationale for pursuing projects with higher returns.

In essence, a higher IRR compared to the benchmark means the project is a favorable opportunity for investment based on expected returns.