The Internal Rate of Return (IRR) is a financial metric that indicates the rate of return used in capital budgeting to measure and compare the profitability of investments. The IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment.IRR is a rate quantity and is an indicator of the efficiency, quality, or yield of an investment. The investment with a higher IRR is the better choice.
Formula for Internal Rate of Return
The IRR is the rate for which the NPV is zero. The formula is used for a standard investment analysis model, which has a value stream, Revenue (R), and two cost streams, Development Cost (D) and Maintenance Cost (M). For the NPV in a standard investment analysis model, the IRR is calculated by using this formula to find r:
Note The formula does not have a closed form solution. The value of r is approximated by using calculations.
