IRR - Internal Rate Of Return

Formal

Companies appraise investments by comparing the benefits against the costs, and discounting these cash flows with reference to time. The IRR is the discount rate (Minimum return (pa%)) that when applied to the cash outflows and inflows delivers a project Net Present Value of zero. This is therefore the actual %age return per annum on the funds used for the investment.

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Straight Talk

Take all the cash outflows, and all the cash inflows for an investment. What rate of return per annum is derived by accepting the project? Answer = the IRR %age. A high IRR shows a very profitable project whereas a low IRR delivers lower %age returns. Comparing this result against the minimum percentage needed for the customer decision makers will be the determining factor in whether to invest/buy or not.

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