IRR, or internal rate of return, refers to the discount rate that, when used, results in a zero net present value of existing cash flows from an investment or project. It is used in capital budgeting to rank prospective investments or business projects with a higher IRR.
As IRR is based on projected return rate, it rarely matches the actual rate of return generated. A project with a higher IRR value, however, is more likely to be a better investment option, because it is more likely to demonstrate strong growth. IRR can also be used to compare a prospective investment to the returns that investing in the securities market might generate.