Internal Rate of Return

The Internal Rate of Return is a part of discounted cash flow method that aids us in making an investment decision. It is the discount rate(R) that allows the NPV (Net Present Value) of a project to be 0 (zero). The project will be accepted if the discount rate exceeds the interest rate/growth rate(r).

Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of an investment. It is a measure of the annualized rate of return for a cash flow stream that is expected from an investment, expressed as a percentage. IRR represents the rate of return at which the net present value (NPV) of an investment's cash flows is equal to zero. It is used to assess the attractiveness of an investment and to compare different investment opportunities.

IRR is typically used in capital budgeting and investment appraisal to determine the profitability of a proposed project or investment. It helps to compare different investments and to determine the optimal time to invest or divest in a project. IRR is calculated by finding the discount rate that makes the net present value (NPV) of all cash flows from an investment equal to zero.

It's important to note that IRR has some limitations, such as multiple IRR or the reinvestment rate assumption. It's also important to consider other metrics such as net present value (NPV) and payback period when evaluating the profitability of an investment.