What is the Internal Rate of Return (IRR)?
IRR is a measure of profitability, usually for an investment.
It can be calculated by taking the difference between all cash flows to determine the net present value and dividing this number by one minus the discount rate.
This Net Present Value will then give you your IRR!
In this project we have three different cash flows that are occurring in year one.
The first flow is $5,00 received at time 0 which was invested for 12 months with a 20% return on investment (ROI).
The second flow is $2,500 received at time 1 which was also invested for 12 months at 20%.
And finally there was another $3,00 that was received at time 18 with a 0% ROI.
What is the IRR for this project?
* The first flow has an IRR of 40%.
* Finally, because all flows occurred in year one and we have already considered both other investments that had positive returns on investment (ROIs).
The third cash flow also has a 20% internal rate of return! which means that our final answer to what is the internal rate of return?