Glossary
Internal rate of return
Also called IRR
Definition
Internal rate of return (IRR) is the discount rate at which the present value of an investment's cash flows, including the initial outlay and any sale value, equals zero. It's the investment's effective annual return when money comes in over time.
How internal rate of return works
IRR works best for comparing projects with similar size and timing. It assumes reinvestment at the IRR.
The cash multiple complements it by showing total money returned.
Why it matters to a firm
Helping clients test sponsor-quoted IRRs adds real value.
Calculators that use internal rate of return
Questions about internal rate of return
What's a good IRR?
Above the required return for the risk.
Is IRR the same as ROI?
No, IRR accounts for timing.
Can IRR mislead?
Yes, with optimistic exit values.
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Related terms: Present value · Compound annual growth rate
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