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Internal Rate of Return (IRR)

Definition

The discount rate that makes a project's NPV equal to zero.

How It Works

IRR is found by trial and error or financial calculator. Compare IRR to the hurdle rate to decide acceptance.

Example

If a project has IRR of 15% and the hurdle rate is 10%, accept the project.

Common Misconceptions

✗IRR is always better than NPV for decisions
✗Higher IRR always means a better project

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FAQs

Common questions about Internal Rate of Return (IRR)

With non-conventional cash flows (signs change more than once) you can get multiple IRRs.

Modified IRR reinvests cash flows at WACC instead of at the IRR itself, fixing the unrealistic reinvestment assumption. MIRR always gives a single answer even when regular IRR has multiple solutions.