Internal Rate Of Return (Irr) Definition
The Internal Rate of Return (IRR) is a financial metric used to assess the profitability of an investment. The IRR is the discount rate that makes the net present value (NPV) of an investment equal to zero. In other words, it’s the interest rate that makes the cash flows from an investment equal to its initial cost.
The IRR can be used to compare different investments and determine which one is more profitable. It can also be used to decide whether or not to proceed with an investment. For example, if the IRR on an investment is lower than the company’s cost of capital, then the investment is not worth pursuing.
There are a couple of things to keep in mind when using the IRR metric. First, it assumes that all cash flows are reinvested at the IRR. This may not be realistic in the real world. Second, it doesn’t take into account the time value of money. This means that it doesn’t consider how long it takes for an investment to generate its cash flows.
