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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.
The kind of thing the test asks
- 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…