IRR — Internal Rate of Return
Cash Flows (one per line, first = initial investment negative)
The Internal Rate of Return (IRR) is the discount rate making an investment's NPV equal zero — the annualised effective return. Compare to your hurdle rate to decide whether to invest.
- 1Solve: 0 = Σ Cₜ/(1+IRR)ᵗ — iterative calculation
- 2IRR > hurdle rate → accept investment
- 3Multiple sign changes in cash flows can give multiple IRRs
- 4Useful for comparing investments of different sizes
−$10k initial; $3k, $4k, $5k, $6k over 4 years=IRR ≈ 22.8%
| Comparison | Decision |
|---|---|
| IRR > hurdle | Accept |
| IRR = hurdle | Marginal |
| IRR < hurdle | Reject |
References
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