The internal rate of return, or IRR, is a measure of an investment’s or a project’s profitability.
Investors and companies use the metric to measure or estimate their returns on a particular use for their money.
The IRR can be used in two main ways:
|To estimate future returns||To measure past returns|
|Data you need||
|What IRR tells you||
Companies can use IRRs to evaluate past or potential future projects, such as:
Investors can use IRRs to evaluate some types of investments. In particular, it’s often used with:
The IRR isn’t the only metric companies have for evaluating projects. They can also consider a project’s net asset value, or NPV.
Here’s how IRRs and NPVs compare:
|What it is||A percentage return figure||A dollar value|
|What it means||The annualized return rate the company earned (or expects to earn) on its project||The dollar amount of value the project adds to the company|
|Best uses||For evaluating a single project or multiple projects that aren’t mutually exclusive||For deciding which project to invest in if you have multiple options but you can only choose one|
The internal rate of return, or IRR, is one way a company or investor can calculate potential profitability of a project or an investment. It might help a business decide between different ways of spending money or help an investor measure returns on a venture capital or private equity investment. Generally, the higher the IRR, the better the investment.