IRR (Internal Rate of Return) Concept

Internal Rate of Return (IRR) represents the profitability generated by a certain investment (a lot used with one of the key indicators in viability analysis studies), being, represents such an interest rate, that if the capital invested had been placed at that rate, we would obtain exactly the same rate of final profitability. By other words, represents a rate used as discount rate, makes the NPV (Net Present Value) equal to zero. From the moment that the investments projects profitability is known, the decision criteria about the investment consist simply in accepting the one which present an IRR superior to the funding cost added a certain risk rate that is associated to it.

Calculation formula:

CFi = Cash-flow in the year i; t = Internal Rate of return

Being this equation of difficult mathematical calculation (its resolution is only possible through repeated approaches) are usually used computers.

 

 

Translated from Portuguese by Susana Saraiva, Portuguese-English and English-Portuguese translation specialist. Contact: spams@sapo.pt.