Glossary · I
Internal Rate of Return (IRR)
Internal Rate of Return
The discount rate at which an investment’s NPV is zero
What it means
The internal rate of return is the discount rate that makes the net present value of a project’s cash flows equal to zero. It is used to assess investments alongside the cost of capital. Some cash-flow patterns produce multiple IRRs or no meaningful IRR, so it should be considered with NPV and other measures.
What it means for a business
A finance team can compare a project’s IRR with its required return, then examine the assumptions behind the cash flows. When comparing projects of different sizes or timing, NPV and sensitivity analysis help avoid choosing on the percentage return alone.