The internal rate of return is the discount rate that results in a zero net present value for the project.
What is internal rate of return?
- In financial analysis, the internal rate of return (IRR) is a statistic used to calculate the profitability of possible investments.
- IRR is a discount rate that, in a discounted cash flow analysis, reduces all cash flows' net present values (NPV) to zero.
- The same formula is used for NPV calculations and IRR calculations.
- Remember that the project's true financial value is not represented by the IRR. The annual return is what brings the NPV to a negative value.
- Generally speaking, an investment is more favorable to make the greater the internal rate of return.
- IRR can be used to rank a variety of potential investments or projects on a pretty even basis because it is consistent for investments of all types.
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