What is 'Internal Rate Of Return  IRR'
Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.
The following is the formula for calculating NPV:
where:
C_{t} = net cash inflow during the period t
C_{o}= total initial investment costs
r = discount rate, and
t = number of time periods
To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate r, which is here the IRR. Because of the nature of the formula, however, IRR cannot be calculated analytically, and must instead be calculated either through trialanderror or using software programmed to calculate IRR.
Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects a firm is considering on a relatively even basis. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.
IRR is sometimes referred to as "economic rate of return” (ERR).
BREAKING DOWN 'Internal Rate Of Return  IRR'
You can think of IRR as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth. One popular use of IRR is in comparing the profitability of establishing new operations with that of expanding old ones. For example, an energy company may use IRR in deciding whether to open a new power plant or to renovate and expand a previously existing one. While both projects are likely to add value to the company, it is likely that one will be the more logical decision as prescribed by IRR.
In theory, any project with an IRR greater than its cost of capital is a profitable one, and thus it is in a company’s interest to undertake such projects. In planning investment projects, firms will often establish a required rate of return (RRR) to determine the minimum acceptable return percentage that the investment in question must earn in order to be worthwhile. Any project with an IRR that exceeds the RRR will likely be deemed a profitable one, although companies will not necessarily pursue a project on this basis alone. Rather, they will likely pursue projects with the highest difference between IRR and RRR, as chances are these will be the most profitable.
IRRs can also be compared against prevailing rates of return in the securities market. If a firm can't find any projects with IRRs greater than the returns that can be generated in the financial markets, it may simply choose to invest its retained earnings into the market.
Although IRR is an appealing metric to many, it should always be used in conjunction with NPV for a clearer picture of the value represented by a potential project a firm may undertake.
Issues with 'Internal Rate of Return (IRR)'
While IRR is a very popular metric in estimating a project’s profitability, it can be misleading if used alone. Depending on the initial investment costs, a project may have a low IRR but a high NPV, meaning that while the pace at which the company sees returns on that project may be slow, the project may also be adding a great deal of overall value to the company.
A similar issue arises when using IRR to compare projects of different lengths. For example, a project of a short duration may have a high IRR, making it appear to be an excellent investment, but may also have a low NPV. Conversely, a longer project may have a low IRR, earning returns slowly and steadily, but may add a large amount of value to the company over time.
Another issue with IRR is not one strictly inherent to the metric itself, but rather to a common misuse of IRR. People may assume that, when positive cash flows are generated during the course of a project (not at the end), the money will be reinvested at the project’s rate of return. This can rarely be the case. Rather, when positive cash flows are reinvested, it will be at a rate that more resembles the cost of capital. Miscalculating using IRR in this way may lead to the belief that a project is more profitable than it actually is in reality. This, along with the fact that long projects with fluctuating cash flows may have multiple distinct IRR values, has prompted the use of another metric called modified internal rate of return (MIRR). MIRR adjusts the IRR to correct these issues, incorporating cost of capital as the rate at which cash flows are reinvested, and existing as a single value. Because of MIRR’s correction of the former issue of IRR, a project’s MIRR will often be significantly lower than the same project’s IRR. (For more, see: Internal Rate Of Return: An Inside Look.)

IRR Rule
A measure for evaluating whether to proceed with a project or ... 
IRR
The currency abbreviation or currency symbol for the Iranian ... 
The Net Internal Rate Of Return ...
A measure of a portfolio or fund's performance that is equal ... 
Pooled Internal Rate Of Return ...
A method of calculating the overall internal rate of return (IRR) ... 
Modified Internal Rate Of Return ...
While the internal rate of return (IRR) assumes the cash flows ... 
Net Present Value  NPV
Net Present Value (NPV) is the difference between the present ...

Investing
Internal Rate Of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
Investing
Return on Investment (ROI) Vs. Internal Rate of Return (IRR)
Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI). 
Entrepreneurship & Small Business
Calculating the Internal Rate of Return Using Excel
The internal rate of return on investments is explained and illustrated in different investment scenarios. 
Markets
Internal Rate of Return Formula for Excel
The internal rate of return, or IRR, is a popular metric businesses use to measure a project’s return on investment. 
Investing
Capital Budgeting: Which is Better, IRR or NPV?
Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense. 
Investing
An Introduction To Capital Budgeting
We look at three widely used valuation methods and figure out how companies justify spending. 
Markets
Modified Internal Rate of Return (MIRR)
Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation. 
Personal Finance
How to Compare Permanent Life Insurance Policies
How you can use the internal rate of return to compare and purchase a permanent life insurance policy. 
Financial Advisor
What's a Hurdle Rate?
Hurdle rate has two meanings. In the business world, a business typically makes a decision on a capital project based on the net present value approach. To determine the net present value, the ... 
Managing Wealth
Project Manager: Job Description & Average Salary
Discover more about the specific tasks that project managers are responsible for and the average salary that can be expected in such a position.

What is the formula for calculating internal rate of return (IRR) in Excel?
Understand how to calculate the internal rate of return (IRR) using Excel and how this metric is used to determine anticipated ... Read Answer >> 
Which is a better measure for capital budgeting, IRR or NPV?
In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Answer >> 
What's the difference between weighted average cost of capital (WACC) and internal ...
Both weighted average cost of capital (WACC) and internal rate of return (IRR) are great measures for assessing value, but ... Read Answer >> 
Why is the Modified Internal Rate Of Return (MIRR) preferable to the regular internal ...
See why the modified internal rate of return is often a superior metric to the classic internal rate of return for assessing ... Read Answer >> 
What is the formula for calculating the internal rate of return (IRR)?
Learn about the internal rate of return, an important concept in determining the relative attractiveness of different investments. Read Answer >> 
What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...
Find out how companies and managers use hurdle rate, or MARR, and internal rate of return, or IRR, to evaluate projects and ... Read Answer >>