Glossary of Terms

Internal Rate Of Return (IRR) 2015-09-16 08:00:00

Internal Rate Of Return (IRR)

The discount rate at which the net present value of all cash flows (both positive and negative) from a project or investment equal zero.

IRR is calculated using the net present value (NPV) formula by solving for R if the NPV equals zero: NPV= ∑ {Period Cash Flow / (1+R)^T} - Initial Investment, where R represents the interest rate and T represents the number of time periods. The internal rate of return is a useful metric used to compare potential investments that may having differing time horizons or cash flow patterns. Generally speaking, the greater the IRR, the greater the relative expected return after accounting for the time value of money. However, IRR does not account for risk profile of the expected returns, and thus investors often use IRR as one of several metrics in evaluating potential investments.

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