## INTERNAL RATE OF RETURN - IRR

The internal rate of return (IRR) is the interest rate such that the discounted sum of net cash flows is zero. If the interest rate were equal to the IRR, the net present value would be exactly zero. The IRR cannot be determined by an algebraic formula, but it rather has to be approximated by trial and error methods.

A project is judged to be valuable if the IRR is greater than the cost of capital. If this is the case, the project could have supported a higher discount rate than was used in the analysis, and still make a positive payoff. *IRR* = [r*; NPV=0]

Where:

NPV = Net Present Value

B = benefits

C = costs

t = time

r = discount rate

Editor: Carmen NOTARO

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