Capital & valuation

Internal rate of return

The discount rate at which a project's NPV is zero — the annualised return the cash flows imply. Compare it to the cost of capital.

Owned by: Senior analystTest band: Senior analyst

In practice

IRR flatters short, front-loaded projects and can have two answers when flows change sign twice. Rank projects by NPV; use IRR to communicate.

Two projects need the same investment. A has an IRR of 30% and NPV of $50k; B has an IRR of 22% and NPV of $120k. With no capital constraint, choose…

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