GlossaryAdvanced
Internal Rate of Return (IRR)
The discount rate at which a series of cash flows' Net Present Value equals exactly zero -- a single rate summarizing an investment's overall return.
Internal Rate of Return (IRR) is the specific discount rate at which a series of cash flows' Net Present Value (see Kaavon's "Net Present Value (NPV)" glossary definition) equals exactly zero, providing a single percentage figure that summarizes an investment's overall return across potentially irregular, multi-period cash flows.
IRR is commonly compared against a required rate of return or cost of capital to judge whether an investment clears the necessary hurdle, functioning as a related but distinct framework from NPV for evaluating the same underlying cash-flow stream.
Examples
- An investment's IRR exceeding an investor's required rate of return is generally treated as a signal the investment clears the necessary hurdle.
- IRR and NPV are closely related, both derived from the same discounted cash-flow stream, but expressed and interpreted differently.