Internal Rate Of Return (IRR)

Formal

Companies appraise investments by comparing the benefits against the costs, and discounting these cash flows with reference to time. The IRR is the discount rate (Minimum return (pa%)) that when applied to the cash outflows and inflows delivers a project Net Present Value of zero. This is therefore the actual %age return per annum on the funds used for the investment.

Real-world Example

A $100,000 investment returns $30,000 a year for 5 years. That cash flow pattern works out to an IRR of roughly 15%, meaning the investment effectively earns 15% per year.