The internal rate of return of investment, or IRR, is a very important figure to look at when comparing various investment opportunities. A high IRR means that you are making money faster than you are spending, and a low IRR means that you are losing money faster. An IRR of 6% or less is unacceptable.
IRR is calculated by subtracting the expected cash flows from the investment from the cost paid. It is a common metric to compare investment projects, and it is often used to determine the worthiness of a project. It is also useful for evaluating projects, because it can provide a very helpful indicator of a project’s profitability. However, the internal rate of return has its limitations. For example, it cannot be applied to projects with unpredictable cash flows or fluctuating life spans. It also ignores the future costs and reinvestment rate and may not provide a realistic assessment of a project’s profitability. Modern techniques are emerging to overcome these problems.
The internal rate of return is often the best metric for comparing investments. However, it is not as useful as net present value (NPV) in ranking multiple prospective investment options. Generally, the higher the IRR, the better the investment option is. However, in many cases, the actual IRR can be lower than the theoretical value.