What is Internal Rate of Return?

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sciencesolve | Teacher | (Level 3) Educator Emeritus

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The definition of internal rate of return specifies that it is the interest rate at which the negative cash flow of investment is equal to the positive cash flow.

The internal rate of return is used as an indicator to predict if an investment is profitable, hence, for an investment to be economically profitable, the established cost of capital of investment needs to be smaller than the internal rate of return.

The selection of a profitable project, among others, depends on the internal rate of return, hence, the project whose internal rate of return exceeds the other internal rates of return, will be prioritized.

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