Fundamental Glossary / Valuation Methods
Internal Rate of Return (IRR)
The discount rate that makes the net present value of a set of cash flows equal to zero.
Formula
Solve for r in the NPV equation so that NPV is zero. For a simple investment, it is the rate earned on the capital that stays invested.
What it means
IRR is a rate of return. NPV is an amount of value. A project with a high IRR on a tiny outlay can create less wealth than a project with a lower IRR on a large outlay.
Compare IRR with the hurdle rate, often WACC for a project of similar risk. IRR above the hurdle is the acceptance test in rate form.
How to read it
Use NPV and IRR together. If they rank two projects differently, trust NPV for the value created, and ask whether the high-IRR project can be repeated.
What to watch
IRR misleads when cash flows change sign more than once, because more than one rate can solve the equation. It also assumes interim cash flows are reinvested at the IRR, which is optimistic when the IRR is very high.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.