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IRR
(Internal Rate of Return)
IRR (Internal Rate of Return) is the discount rate that makes the NPV of all cash flows from a project equal to zero. It represents the annualized effective compounded return rate of an investment.
Used extensively in private equity and LBOs, a 25% IRR means the investment grows at 25% annually. While useful for comparing projects, IRR has limitations—it assumes reinvestment at the same rate and can be misleading for non-conventional cash flows. The SEC requires IRR disclosure in real estate and energy investments. For mutually exclusive projects, NPV is often preferred as IRR may favor smaller, shorter-term investments over larger value-creating ones.
Used extensively in private equity and LBOs, a 25% IRR means the investment grows at 25% annually. While useful for comparing projects, IRR has limitations—it assumes reinvestment at the same rate and can be misleading for non-conventional cash flows. The SEC requires IRR disclosure in real estate and energy investments. For mutually exclusive projects, NPV is often preferred as IRR may favor smaller, shorter-term investments over larger value-creating ones.