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IRR – Internal Rate of Return

IRR - Internal Rate of Return

In order to build shareholder equity, firms carefully evaluate projects to decide which projects they should fund and which they shouldn’t.

The project management team of a company seeks projects that can enhance shareholder’s value and avoid those that cannot earn back the cost of the capital.

When it comes to evaluating projects, the IRR or internal rate of return is considered to be one of the most widely used methods. IRR is used to calculate the projects return rate or the desirability of an investment. It is a popular metric in capital budgeting to measure the profitability of a project.

The higher the IRR of a project, the more desirable it will be. Consider this; all projects that you are evaluating require more or less the same up-front investment. In such a scenario, it’s best to calculate the internal rate of returns to narrow down your choice and undertake the best one with the highest IRR.

The internal rate of return is also described as an important indicator of:

  • The efficiency
  • Quality
  • And also the yield of a project investment

It is a rate of interest that makes NPV (the net present value) zero. IRR is a discounted cash flow technique that offers project investors a good way to judge an investment and make an informed decision.

How is IRR Calculated?

Since the IRR makes NPV zero the calculations of IRR, incorporate the same computation formula as NPV.


Further Reading


The internal rate of return (IRR) as a financial indicator
www.tandfonline.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

A resolution to the NPV–IRR debate?A resolution to the NPV–IRR debate?
www.sciencedirect.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

A different perspective on using multiple internal rates of return: the IRR parity techniqueA different perspective on using multiple internal rates of return: the IRR parity technique
www.tandfonline.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

Prepurchase financing pool: Revealing the Prepurchase financing pool: Revealing the
www.tandfonline.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

The Limited Relevance of the Multiple The Limited Relevance of the Multiple
www.tandfonline.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

Environmental project evaluation: IRR-based decision support with a Monte Carlo simulation algorithmEnvironmental project evaluation: IRR-based decision support with a Monte Carlo simulation algorithm
www.tandfonline.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

The hazards of using IRR to measure performance: The case of private equityThe hazards of using IRR to measure performance: The case of private equity
papers.ssrn.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

Re-examining an old question: Does the IRR method implicitly assume a reinvestment rate?Re-examining an old question: Does the IRR method implicitly assume a reinvestment rate?
www.jstor.org [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

The variable financial indicator IRR and the constant economic indicator NPVThe variable financial indicator IRR and the constant economic indicator NPV
www.tandfonline.com [PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …

Interest Rate Liberalization and Credit Rationing; A Real Option Model Based on IRR <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JRYJ200703009.htm' />Interest Rate Liberalization and Credit Rationing; A Real Option Model Based on IRR [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JRYJ200703009.htm'>PDF]
… On multiple rates of return.. The Journal of Finance, Vol. 23(No … The internal rate of return—A critical study.. Engineering Costs and Production Economics, Vol … The variable financial indicator IRR and the constant economic indicator NPV.. The Engineering Economist, Vol …



Q&A About IRR – Internal Rate of Return


Why do you need to calculate the internal rate of return for a project?

To narrow down your choice and undertake the best one with the highest IRR.

What does NPV represent in terms of investments?

It represents how much money you would have at present if you invested a certain amount now and received future cash flows over time.

What does NPV stand for?

Net Present Value.

What does IRR measure?

The rate of return or the desirability of an investment.

How do you calculate return?

You can calculate return by subtracting your initial investment from your final value. Then divide this number by your initial investment to get a percent. This will give you your rate of return.

How can you find out if your company has been successful in its projects by calculating its internal rates of returns ?

By comparing them with other companies' rates .

What is IRR?

Internal Rate of Return.

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