What is internal rate of return?
Internal rate of return (IRR) represents the rate of return that equates the net present value of future cash flows from an investment to zero. It gauges the profitability or yield of a project and is utilized for comparing project profitability and assessing the feasibility of an investment.
How to calculate internal rate of return?
The internal rate of return (IRR) calculates the rate of return where the net present value of a cash flow series is zero. Irr computation can be performed using financial calculators or spreadsheets. For financial calculators, input the cash flow stream, the number of periods, and the initial investment, then compute the irr. Using a spreadsheet, input the data and use the irr function to derive the rate.
Who utilizes internal rate of return?
The internal rate of return (IRR) is employed by individual investors, financial analysts, and portfolio managers to evaluate the profitability of an investment.
Considerations when working with internal rate of return
Be cautious when computing the internal rate of return. Assumptions include reinvestment of all cash flows at the calculated irr, requiring reasonable cash flow projections. Accuracy in timing cash flow occurrences is crucial due to the calculation's sensitivity. Remember that irr represents a theoretical rate based on assumptions and is not a guaranteed rate of return.