What Is the Definition of "IRR"?


Quick Answer

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.

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Full Answer

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.

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