Internal Rate of Return. I’m probably over simplifying, but it’s how investments report what their effective compound interest rate was based on the cashflow returns.
This post also talks about “Interim IRR” (I’ve also heard it called “paper IRR”), which a lot of funds report based on the current marked up valuation of the portfolio. It’s what the IRR would be if everything could be liquidated based on the current last/valuation. Which has never made any sense to me and seems like pure vanity if not actively disingenuous. You’re not liquid. You’ve not provided any cashflow returns. There is no IRR yet.
But I guess people need a way to justify their paper performance.
The rate at which your project becomes NPV positive.
If it takes $100 one year to return $110, then the irr is 10%, because a 10% interest rate would cause you to owe $10 at the end of the first year, which is exactly equal to cash generated.
Irr usually takes average accounting income per year in the denominator e.g. $10 in our case, and divided by the investment size.
Note: an investment that yields $5 at the end of each of two years is more attractive than one that pays $10 at the end of two years. Both have average accounting income of $5 per year, and the IRR is the same for each investment!!!!!! NPV scores the first incessant higher than the later--yet another reason why irr is a bad metric
Internal rate of return. Very short version is it is the expected growth rate of an investment. Longer version is it is the rate of growth of capital assuming the net present value of the investment is $0.
That said I've never quite understood the specific pros/cons behind favoring IRR over other metrics.
