ECONOMICS

Detailed explanation-1: -What Is Internal Rate of Return (IRR)? The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.

Detailed explanation-2: -Internal rate of return (IRR) is a method of calculating an investment’s rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or financial risk.

Detailed explanation-3: -Another name for IRR is ‘economic rate of return’ (ERR), which clarifies the regaining of the investments. The internal return makes the net present value of all cash flows from an investment, also known as Net Present Value (NPV), equal to zero.

Detailed explanation-4: -The internal rate of return (IRR) measures the return of a potential investment. The calculation excludes external factors such as inflation and the cost of capital, which is why it’s called internal.

Detailed explanation-5: -The formula for calculating the internal rate of return (IRR) is as follows: Internal Rate of Return (IRR) = (Future Value ÷ Present Value)^(1 ÷ Number of Periods) – 1. Conceptually, the IRR can also be thought of as the rate of return wherein the NPV of the project or investment equals zero.