IRR

Business Finance

Internal Rate of Return (IRR) is the discount rate that makes a project's NPV equal to zero — effectively the annualized return percentage. A project with positive NPV at your cost of capital has an IRR exceeding cost of capital. Decision rule: accept if IRR > cost of capital. IRR's appeal is its percentage output, easier to communicate than NPV's dollar amount. Limitations: assumes interim cash flows reinvest at IRR (often unrealistic), can produce multiple values for non-conventional cash flow patterns, scale-blind (project with $100 NPV and 50% IRR vs. $1M NPV and 20% IRR — IRR favors the smaller). Use IRR alongside NPV.