IRR—along with payback and net present value—is one of three metrics commonly used to evaluate return on investment over multiple periods. An IRR will typically be compared to a firm’s hurdle rate. If IRR is higher than the hurdle rate, invest; if lower, pass. For instance, a company might decide to undertake only projects with a return greater than 12%.
Internal Rate of Return (%) = The discount rate for which the net present value is zero for a series of future cash flows after accounting for the initial investment
Note that IRR does not describe the magnitude of return; $1 on $10 is the same as $1 million on $10 million.
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.