Concept:

Concept:
The concept is based on the ordinary mathematical technique of
computing present value of a given series of returns discounted at
a specified discount rate.

Let’s take an example of a short-lived project (5 years). Let R1,
R2….R5 represent the expected stream of returns of this particular
investment project. As the returns are in the future, their values
have to be discounted to the present in order to get their present
value.

Let Sp be the cost of undertaking the project – i.e. the replacement
cost of capital or "supply price" of capital goods.
The internal rate of return (or marginal efficiency of investment)
would be the discount rate , which will equate the expected yield
with the supply price of capital.