An Internal Rate of Return (IRR) is one of the most popular metrics used to measure the profitability of potential investments. The IRR is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. An IRR takes into account the time value of money, analysing an investment project by comparing the internal rate of return to the minimum required rate of return.
Generally speaking, the higher an internal rate of return, or the IRR of a new project exceeds a company's required rate of return, the more desirable it is to undertake the project.
An IRR can be viewed as the rate of growth a project is expected to generate. A project with an estimated higher IRR than other available options will provide a much better chance of strong growth than those with an estimated lower IRR.
The IRR allows project owners and property groups to rank projects by overall rates of return rather than their net present values. An IRR can also be compared against prevailing rates of return in the securities market.
Internal rate of return (IRR) and Return on Investment (ROI) are two common metrics used to show how an investment has performed over time. Although similar, there two metrics describe investment performance in different terms.
An ROI tells an Investor about the total growth, start to finish, of the investment, while an IRR tells the Investor what the annual growth rate is.
"Any advice provided on this blog is general in nature. Readers are urged to seek their own professional advice before making decisions."