Internal Rate of Return (IRR)

Internal Rate of Return (IRR) is a financial calculation or metric used in the analysis of an investment, estimating the potential return. If the IRR is greater than the WACC, the investment adds value.

To grasp the concept of IRR, think of it like this. A company must fund its operations via a combination of Debt and Equity. The combined cost is the Weighted Average Cost of Capital (WACC). In general, the investment or project with the highest IRR is the best opportunity. Of course, there are other aspects to evaluate. The relationship between the IRR and Net Present Value (NPV) must be taken into consideration. In the Discounted Cash Flow calculation, if the NPV is zero, then the Discount Rate is equal to the IRR. Keep in mind, IRR is expressed as a percent, while NPV is a value.