Internal rate of return (IRR)

[Lorenzo Incarnato]

1 Abstract: (13/02)

The Internal Rate of Return (IRR) is a key component of capital budgeting and corporate finance to estimate the profitability of potential investments. Organizations usually calculate the Internal Rate of Return to decide among multiple investments alternatives () It is defined as the discount rate (%) that makes the Net Present Value equal to zero in a discounted cash flow analysis. One of the most important jobs in any company management team is deciding which project to fund and which project to ignore. The IRR is one of the most popular methods of evaluating potential projects. The formula delivers a single discount rate that only depends on the cash flow of the project, and does not depend on the market interest rates as in the case of the calculation of the NPV, and this is the reason why it is called Internal Rate of Return.

2 Importance of the discount rate: time value of money

3 Internal Rate of Return: definition and formula

4 In which project is it worth investing in according to IRR?

5 Application: Internal rate of return in practice

6 Internal Rate of Return (IRR) vs Return on Investment (ROI) vs Net Present Value (NPV)

7 Limitations

8 Bibliography