Internal Rate of Return (IRR)

The discount rate often used in capital budgeting that makes the net present worth of all cash flows from a scheme equal to zero. Generally the higher a project’s interior rate of return, the more desired it is to undertake the project. IRR can be used to rank several potential projects a corporation is considering. Assuming all other aspects are equal amongst the various projects, the project with the highest IRR would probably be measured the best and undertaken first. IRR is sometimes stated to as economic rate of return (ERR).

Think of IRR as the rate of development a project is anticipated to produce. While the actual rate of return that a given project finishes up generating will often differ from its expected IRR rate, a project with a substantively higher IRR value than other accessible options still would provide a much better chance of sturdy growth.

IRRs also can be compared against dominant rates of return in the safeties market. If a company can’t find any projects with IRRs greater than the revenues that can be generated in the financial markets, it may choose to spend its reserved earnings into the market.