Meaning and calculation
IRR is the rate at which the NPV of a specified set of cash flows becomes zero. It links the amounts and timing of investments with expected receipts. For an ordinary project with an initial outlay followed by positive cash flows, the measure helps compare the calculated return with a selected required return.
Illustrative example and limits
If 100 thousand roubles are invested today and the only expected repayment after one year is 110 thousand roubles, the IRR is 10% per year. The example contains no interim payments or additional costs. For more complex cash flows, the rate is found numerically using dates or regular periods.
IRR is not a guaranteed return and does not always provide an unambiguous ranking of projects. When cash flows change sign repeatedly, several solutions or no suitable solution may exist. Projects of different scale can also conflict when ranked by IRR and NPV. The measure should therefore be used together with absolute value, a risk scenario and a review of the input cash flows. Related reading: [discounted cash flow](/guides/discounted-cash-flow/), [NPV](/glossary/npv/), [yield to maturity](/glossary/dohodnost-k-pogasheniyu/) and the [bond scenario tool](/tools/bond-scenario/).