internal rate of return

Internal rate of return (IRR)

Dollar-weighted rate of return. Discount rate at which net present value (NPV) investment is zero. The rate at which a bond's future cash flows, discounted back to today, equal its price.

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internal rate of return (IRR)

The rate of discount on an investment that equates the present value of the investment's cash outflows with the present value of the investment's cash inflows. Internal rate of return is analogous to yield to maturity for a bond.

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internal rate of return

The annual rate of earnings on an investment equates the value of cash returns with the cash invested,taking into consideration the power of compounding interest.The following formula requires a trial-and-error method for solution. The fallacy with the method is its assumption that all cash flows are reinvested at the internal rate of return.

Using this formula,CF is the cash flow in each period,with one subpart of the formula for each investment year until you reach n,the final year of the investment.You have to solve for R, the annual rate, by trial and error.

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Internal Rate of Return (IRR)

What Does Internal Rate of Return Mean?

The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally, the higher a project's internal rate of return is, the more desirable it is to undertake. Thus, IRR can be used to rank potential projects. Assuming all factors are equal, the project with the highest IRR probably would be considered the best and would be undertaken first. IRR sometimes is referred to as the economic rate of return (ERR).

Investopedia explains Internal Rate of Return

One can think of IRR as the rate of growth a project is expected to generate. Although the actual result may differ from the estimated IRR rate, a project with a substantially higher IRR value than other available options still will provide a much better chance for strong growth. IRRs also can be compared against prevailing rates of return in the securities market. If a firm cannot find any projects with IRRs greater than the returns that can be generated in the financial markets, it may choose to invest its retained earnings in the market.

Related Terms:
• Discount Rate
• Discounted Cash Flow—DCF
• Interest Rate
• Modified Internal Rate of Return—MIRR
• Present Value Interest Factor—PVIF