Internal rate of return

Internal rate of return (IRR) is a method of quantifying the merits of a project or investment opportunity. The calculation is termed internal because it depends only on the cash flows of the investment being analyzed and excludes external factors, such as returns available elsewhere, the risk-free rate, inflation, the cost of capital, or financial risk.[1]

The method may be applied either ex-post or ex-ante. Applied ex-ante, the IRR is an estimate of a future annual rate of return. Applied ex-post, it measures the actual achieved investment return of a historical investment.

It is also called the discounted cash flow rate of return (DCFROR)[2] or yield rate.[3]

  1. ^ Ross, Stephen A.: Westerfield, Randolph W.; Jordan, Brandon (24 February 2009). Fundamentals of Corporate Finance (ninth; alternate ed.). Boston: McGraw-Hill Irwin. p. 273. ISBN 978007724612-9.{{cite book}}: CS1 maint: multiple names: authors list (link)
  2. ^ Project Economics and Decision Analysis, Volume I: Deterministic Models, M.A.Main, Page 269
  3. ^ Kellison, Stephen G. (2009). The theory of interest (Third ed.). Boston: McGraw-Hill Irwin. pp. 251–252. ISBN 978-0-07-338244-9. OCLC 182552985.

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