IRR (Internal Rate of Return)
Definition
The discount rate at which the net present value of all cash flows equals zero. Used to evaluate and compare investment opportunities.
Why is IRR (Internal Rate of Return) Important?
IRR (Internal Rate of Return) is a critical concept in corporate finance, business analysis, and investment decision-making. Whether you are evaluating a company's performance, assessing an investment opportunity, or running your own business, understanding this metric helps you make data-driven decisions that maximize returns and minimize risk.
Our business calculators provide instant computations for this metric, empowering entrepreneurs, analysts, and investors to evaluate financial health and make strategic decisions with confidence.
What is IRR (Internal Rate of Return)?
Internal Rate of Return (IRR) is the discount rate at which an investment's Net Present Value (NPV) equals zero. In other words, it is the expected compound annual growth rate an investment will generate. It is one of the most widely used capital budgeting metrics.
Decision Rule
| Scenario | Decision |
|---|---|
| IRR > WACC (or hurdle rate) | Accept โ (investment creates value) |
| IRR = WACC | Indifferent (breaks even on a risk-adjusted basis) |
| IRR < WACC | Reject โ (investment destroys value) |
IRR Benchmarks
| Investment Type | Typical Required IRR |
|---|---|
| US Treasury bonds | 4โ5% (risk-free baseline) |
| Corporate bonds | 5โ8% |
| Public equity market | 8โ10% |
| Real estate investment | 10โ15% |
| Private equity | 15โ25% |
| Venture capital | 25โ50%+ |