Internal Rate of Return (IRR)

The discount rate at which the net present value of an investment becomes zero, indicating the expected return on an investment.

Internal Rate of Return (IRR) is a financial metric that helps small business owners assess the profitability and potential of an investment or project. It represents the rate at which the net present value (NPV) of cash flows becomes zero, indicating the point of break-even. The IRR considers both the size and timing of cash flows, providing insights into the return on investment. A higher IRR indicates greater profitability, making it a valuable tool for decision-making and comparing investment opportunities. Calculating the IRR involves discounting future cash flows to their present value and solving for the rate of return that equates the initial investment with the present value of future cash inflows. By incorporating the IRR in financial analysis, small business owners can make informed investment choices and evaluate the attractiveness of projects.