Internal rate of return (IRR)

[Lorenzo Incarnato]

Abstract (13/02)

The Internal Rate of Return (IRR) is a key component of capital budgeting and corporate finance for estimating and evaluating the profitability of potential investments. It is defined as the rate of return (%) that makes the Net Present Value (NPV) equal to zero in a discounted cash flow analysis. In other words, the IRR is the annual rate of return that an investment is expected to generate. This method is called internal because the formula provides a rate that depends only on the project, more precisely on the cash flows of the project, and does not depend on external factors such as market interest rates as in the case in calculating the NPV. [investopedia]

[under 116 words -- continue...]

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