Internal rate of return (IRR) is the percentage return made on the investment over a period of time; it is the discount rate at which the net present value (NPV) of an investment is zero.
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.