In general, it is best to combine IRR with other metrics such as NPV. It is often used to rank prospective projects on a relatively even basis. IRR is used to estimate the profitability of potential investments: the higher it is, the more desirable it is to undertake the project, while the lower it is, the more risky and overall undesirable. By definition it gives more weight to earlier cash flows than to later cash flows reflecting the time preference of investors.
"Internal" in the name refers to the omission of external factors like capital cost, currency inflation, etc. It is also known as "economic rate of return" and "discounted cash flow rate of return", as well as a "hurdle rate" in the context of evaluation of potential investments. The Internal Rate of Return is the discount rate (interest rate) that makes the net present value (NPV) of all cash flows from a particular project equal to zero. Once ready, press "Calculate" and our Internal Rate of Return calculator will output: Enter the cash flow for each period (past or future prediction). Using the IRR calculation tool is straightforward: simply enter the initial investment (tool says dollars, but it can be in any currency like EUR, Swiss francs, etc.) then select the number of years of cash flow you want to analyze (could be any period, actually, but maximum 25 periods).
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