Internal Rate of Return (IRR)
The internal rate of return (IRR) is the discount rate that makes the net present value of a project’s cash flows equal to zero. In corporate finance, IRR estimates the rate of return implied by a project’s cash flows.
Example: A company projects an initial outlay of $2 million and a series of cash inflows; solving the IRR gives a result of about 12%, which is then compared to the firm’s hurdle rate.
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