Internal Rate of Return (IRR)
Purpose
Determines the rate of return intrinsic in a proposed project or investment. Generally a project or investment with an Internal Rate of Return greater than the discount rate would be undertaken. When comparing different projects note that IRR does not compare or reflect the total dollar amount of investment into those projects.

Formula [Note]
Internal Rate of Return equals the Annual Interest Rate in a Net Present Value equation when NPV is 0.  The standard method to arrive at this is through interpolation. (See Net Present Value for the NPV formula.)

Example
123 Corp. wants to know the Internal Rate of Return of a proposed investment of $1,600,000 to achieve an expected future value of $2,100,000 in 5 years.  The resulting IRR would be approx. 5.59%.
 

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