Internal Rate of Return (IRR): Definition, Formula and vs NPV
IRR is the discount rate that makes NPV zero. It represents the expected rate of return.
IRR Formula
NPV = 0 when IRR is used as discount rate
Decision Rule
- IRR > WACC: Accept
- IRR < WACC: Reject
IRR vs NPV
| Metric | What it measures |
|---|---|
| IRR | Rate of return (%) |
| NPV | Dollar value added |
Limitations
- Assumes reinvestment at IRR
- Can have multiple values
- Doesn't scale
