## What Is Internal Rate of Return (IRR)?

Internal Rate of Return (IRR) is a financial metric used to evaluate the potential profitability of an investment. It’s the rate at which the present value of future cash flows equals the initial investment or the cost of the investment.

In simpler terms, IRR is the rate at which an investment earns a return that is equal to the cost of the investment. It’s often used by investors and analysts to compare the potential profitability of different investment opportunities.

To calculate IRR, you need to estimate the future cash flows that an investment is expected to generate and discount them back to their present value. The IRR is the discount rate that makes the net present value (NPV) of the investment equal to zero.

If the IRR is greater than the required rate of return or the cost of capital, the investment is considered profitable. If the IRR is less than the required rate of return or the cost of capital, the investment is considered unprofitable.

IRR can be a useful tool for decision-making, as it allows investors to compare different investment opportunities and assess which ones are likely to generate the highest return. However, it’s important to use IRR in conjunction with other financial metrics and to carefully consider the assumptions used in estimating future cash flows.