Internal Rate of Return (IRR)

Internal Rate of Return (IRR)

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a metric used in capital budgeting to estimate the profitability of potential investments. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects on a relatively even basis.

Pros

A simple metric to understand the viability of a project.

Cons

Often misunderstood; does not account for non-financial benefits or operational needs.

Real Talk

Your target IRR may not be the same as another's. Work from NPV to learn your IRR target.

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