internal rate of return (IRR)

  

Definition

One of the two discounted cash flow (DCF) techniques (the other is net present value or NPV) used in comparative appraisal of investment proposals where the flow of income varies over time. IRR is the average annual return earned through the life of an investment and is computed in several ways. Depending on the method used, it can either be the effective rate of interest on a deposit or loan, or the discount rate that reduces to zero the net present value of a stream of income inflows and outflows. If the IRR is higher than the desired rate of return on investment, then the project is a desirable one. However, it is a mechanical method (computed usually with a spreadsheet formula) and not a consistent principle. It can give wrong or misleading answers, especially where two mutually-exclusive projects are to be appraised. Also called dollar weighted rate of return.

Use this term in a sentence

  • You need to know the internal rate of return on any investment may be to figure out if it is really worth while.

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  • The internal rate of return on the investment determined by looking into the future and finding out the true value today.

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  • Our internal rate of return was really astounding to me and I went to mu uncle, the business owner, to see what was going on.

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