Internal Rate of Return (IRR).

The internal rate of return (IRR) is the discount rate at which the net present value of all cash flows associated with an investment equals zero. In plain terms, it is the annualized rate of return an investment is expected to generate, accounting for the size and timing of every cash inflow and outflow over its life. IRR is the cornerstone metric of capital budgeting in corporate finance — a firm compares the IRR of a proposed project against its cost of capital (the hurdle rate); if the IRR exceeds the hurdle rate, the project is expected to create value. In private equity and real estate investing, IRR is the standard measure of fund-level performance, reflecting not just how much money was made but how quickly it was returned to investors. Higher IRR is better, but context matters: a 25% IRR on a three-year project and a 25% IRR on a ten-year project represent very different capital commitments. IRR has well-known limitations. It assumes that interim cash flows are reinvested at the IRR itself — an assumption that flatters high-IRR projects when realistic reinvestment rates are lower. Multiple IRRs can exist when cash flows change sign more than once. For comparing mutually exclusive projects of different scale or duration, net present value analysis is often more reliable. Despite these caveats, IRR remains the lingua franca of investment performance discussions in private markets and corporate boardrooms because it collapses a complex cash-flow schedule into a single, intuitive annualized figure that non-specialists can compare against the return they expect from other opportunities.