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Internal rate of return (irr) is the interest rate at which the net present value of all the cash flows from a project or investment equal zero. The cash flows can be both positive and negative. IRR is used to evaluate the attractiveness of a project or investment. Ultimately, IRR gives an investor the means to compare alternative investments based on their yield.
IRR is a metric used in Capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.
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The following is the formula for calculating NPV:
Calculating the internal rate of return can be done in three ways:
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