Learn what internal rate of return means as the discount rate that makes a project's net present value equal to zero.
The internal rate of return (IRR) is the discount rate that makes the net present value of an investment or project equal to zero.
It is one of the most common ways to summarize the annualized return implied by a series of cash inflows and outflows.
IRR solves for the rate at which the present value of future cash inflows exactly matches the upfront investment.
That makes it useful when comparing projects with different timing patterns of cash flow, especially in capital budgeting and private investing.
Suppose a project requires an upfront investment today and then generates cash inflows over several future periods.
If the discount rate that makes those inflows exactly offset the initial outlay is 12%, then the project’s IRR is 12%.
A manager says, “If a project has a high IRR, it must create the most value.”
Answer: Not always. IRR is useful, but project scale, reinvestment assumptions, timing patterns, and net present value still matter.