What Is Internal Rate of Return?
IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. It represents the annualized effective compound return an investment generates. A higher IRR indicates a more profitable investment.
How to Interpret IRR
Compare IRR to your required rate of return (hurdle rate). If IRR > hurdle rate, the investment adds value. Common hurdle rates: 8-12% for corporate projects, 15-20% for venture capital. IRR is best for comparing mutually exclusive projects of similar size and duration.