What is an Internal Rate of Return (IRR)?
The internal rate of return (IRR) is a measure of the profitability of an investment or project. It is calculated as the discount rate at which the net present value (NPV) of the investment or project is equal to zero. In other words, it is the rate at which the sum of the present values of all cash flows from the investment or project equals the initial investment.
The IRR is often used to compare the expected returns of different investments or projects, as it takes into account the timing and magnitude of all cash flows. A higher IRR indicates a higher expected return on investment, while a lower IRR indicates a lower expected return.
The IRR is typically expressed as a percentage and can be used to determine the viability of an investment or project, as well as to compare it to other investments or projects with different risk profiles or required rates of return. It is important to note that the IRR is sensitive to the timing of cash flows and may not accurately reflect the true profitability of an investment or project in all cases.
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