Internal rate of return
Certified Financial Planner glossary · Certified Financial Planner
Definition
The discount rate that sets a project's NPV to zero.
Internal rate of return in plain English
A project breaks even only at some mystery discount rate, and that rate is what IRR reports: the discount rate that sets NPV to zero. Multiple sign changes can produce multiple IRRs, and a higher IRR does not always mean more dollars of value added. Prefer NPV when the stem asks which project adds more wealth at a required return. IRR is a rate of return, not a dollar score, so do not let the bigger percentage win a value-ranking question by default.
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