(IRR)

Internal Rate of Return (IRR)

Investor Term:

IRR

Definition:

Internal rate of return (IRR) is a measure of the profitability of an investment. It is calculated by discounting the future cash flows of an investment back to the present value using a discount rate. The discount rate that makes the net present value (NPV) of the investment equal to zero is the IRR.

Formula:

IRR = (Present Value of Future Cash Flows) / (Initial Investment)

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Example:

For example, if an investment has a present value of $100,000 and an initial investment of $50,000, then its IRR would be 20%. This means that the investment would generate a 20% return on the initial investment.