ECONOMICS

Detailed explanation-1: -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. IRR calculations rely on the same formula as NPV does. Keep in mind that IRR is not the actual dollar value of the project. It is the annual return that makes the NPV equal to zero.

Detailed explanation-2: -However, when NPV, is zero it means that the investment earns a rate of return equal to the discount rate. This makes understanding IRR much easier because an investment that uses a 10% discount rate that returns an NPV of zero indicates the investment would yield a 10% return.

Detailed explanation-3: -The internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that gives it a net present value of 0, or where the sum of discounted cash flow is equal to the investment. The IRR is calculated by trial and error.

Detailed explanation-4: -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-5: -What Are NPV and IRR? Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. By contrast, the internal rate of return (IRR) is a calculation used to estimate the profitability of potential investments.