Monday, 26 May 2014

Definition of 'Internal Rate of Return’ - IRR

This is the rate of return used in capital budgeting to measure and compare the profitability of investements. It is also known as the discounted cash flow rate of return.

The term internal refers to the fact that its calculation does not incorporate environmental factors for example environement or inflation.

Calculating IRR

IRR = = I for NPV = 0

If the NPV> 0 then invest in the project
If NPV = 0 invest only if you do not have better projects

If NPV < 0 Reject the project

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