Internal Rate of Return (IRR)

Internal rate of return (IRR) is a parameter used in the financial analysis of investments to determine the profitability of the investment, in other words, it estimates the rate of return that the evaluated investment could have. The term "internal" is due to the fact that for the calculation of the IRR, external factors that could affect the profitability of the project, such as inflation, are not considered. In mathematical terms, the IRR is defined as the discount rate that causes the sum of the cash flows of the project to be zero. In other words, if the NPV of a project is 0 at a certain rate, that rate is the IRR (Patrick and French, 2016). Tang and Tang (2003) have validated the IRR as an alternative to the net present value (NPV) as an indicator for project evaluation, considering that the IRR as from the point of view of the investor and the NPV from the point of view of the society.