Quick Definition

The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of potential investments by calculating the rate of return at which the net present value of all cash flows (both positive and negative) from a particular investment equals zero.

Formula

Examples

• 1A company evaluates a new project that requires an initial investment of $100,000 and is expected to generate returns of $30,000 annually for the next 5 years. The IRR would help determine if this project is worth the investment.
• 2An investor uses IRR to compare the potential profitability of different real estate investments, each with different cash flow profiles.
• 3A business considers whether to lease or buy equipment based on the IRR of each option, which includes all costs and expected benefits over the equipment's useful life.

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