Internal Rate of Return (IRR)

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Definition: Internal Rate of Return (IRR)

While calculating the Net Present Value (NPV) of a series of cash flows, a discounting rate is considered for every cash flow. The discounting rate at which NPV of the cash flows turns out to be zero is called the Internal rate of return. The IRR is used as a measure to compare the profitability of various project investments.


For an example, consider cash flows of -2000, 1000 & 1500 in the year 0, 1 & 2 respectively, the NPV is given by,

Solving this equation we get,

IRR = 15.14 %

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