IRR

What is Internal Rate of Return (IRR)?

Internal rate of return (irr) is the interest rate at which the net present value of all the cash flows from a project or investment equal zero. The cash flows can be both positive and negative. IRR is used to evaluate the attractiveness of a project or investment. Ultimately, IRR gives an investor the means to compare alternative investments based on their yield.

IRR is a metric used in Capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

IRR Formula

The following is the formula for calculating NPV:

Calculating the internal rate of return can be done in three ways:

• Using a financial calculator
• Using the IRR or XIRR function in Excel or other spreadsheet programs
• Using an iterative process where the analyst tries different discount rates until the NPV equals to zero