Internal Rate of Return (IRR)

The internal rate of return (IRR) is a measure of the return on an investment. It is the discount rate that makes the net present value (NPV) of an investment equal to zero. In other words, it is the rate at which the sum of the discounted cash flows of an investment equals the initial investment.

The IRR is used to evaluate the attractiveness of a business case project or investment. A higher IRR means a higher return on investment. In general, an investment with a higher IRR is considered more desirable than an investment with a lower IRR.

To calculate the IRR, you need to know the initial investment, as well as the expected cash flows from the investment over time. You can then use the Business Case Financial Templates or a spreadsheet to determine the IRR.


IRR vs. NPV

It is important to note that the IRR is only one factor to consider when evaluating an investment. It does not take into account the time value of money, and it does not consider the size of the investment, or the risk associated with the investment. As a result, it is often used in conjunction with other measures during the business case process, such as the NPV and the net present value index (NPVI), to make informed investment decisions.

NPV is considered superior to IRR in business cases because it provides a more comprehensive evaluation by accounting for the time value of money and the total value added by the investment, rather than just the rate of return.