Internal Rate of Return (IRR)
Internal Rate of Return (IRR)
Investor Term:
IRR
Definition:
Internal rate of return (IRR) measures an investment's profitability. It is calculated by discounting the future cash flows of an investment back to the present value using a discount rate. The IRR is the discount rate that makes the investment's net present value (NPV) equal to zero.
Formula:
IRR = (Present Value of Future Cash Flows) / (Initial Investment)
EXAMPLE
EXAMPLE
For example, if an investment has a value of $100,000 and an initial investment of $50,000, its IRR would be 20%. This means the investment would generate a 20% return on the initial investment.