Internal Rate of Return, or IRR, represents the discount rate that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero. In simpler terms, it is an estimate of the profitability of potential investments.NPV: Net Present ValueCt: Cash Inflows During a PeriodC0: Initial Investmentt: Time Periodr: IRRIf there's a one-time investment and a single return in the future, the RATE formula might be simpler to use. However, most investments involve multiple cash flows occurring at different periods. Hence, the IRR method is more commonly used, especially in capital budgeting, project appraisal, and investment planning scenarios.
Learn Internal Rate of Return - IRR with interactive examples and practice exercises in our Mergers and Acquisitions module.
This interactive learning module helps you understand Internal Rate of Return - IRR through hands-on practice and real-world examples.