IRR, or internal rate of return, is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.
- The internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate.
- IRR is calculated using the same concept as net present value (NPV), except it sets the NPV equal to zero.
- The ultimate goal of IRR is to identify the rate of discount, which makes the present value of the sum of annual nominal cash inflows equal to the initial net cash outlay for the investment.
- IRR is ideal for analyzing capital budgeting projects to understand and compare potential rates of annual return over time.
- In addition to being used by companies to determine which capital projects to use, IRR can help investors determine the investment return of various assets.