Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of an investment. It represents the discount rate at which the net present value of future cash flows equals zero. In simpler terms, IRR helps investors determine the expected annual return on an investment over time.
Investors often compare the IRR to a required rate of return or the cost of capital to decide whether to proceed with a project. If the IRR exceeds the required rate, the investment is generally considered favorable, while a lower IRR may indicate a less attractive opportunity.