Internal Rate of Return - IRR

LEONa

Can anyone help me. I understand the mathematics of IRR but I cannot grasp what the result is actually telling me.

For example, I understand, as a management tool, the significance of NPV which shows the difference between total discounted cash flows and the initial cost, thus enabling a company to make realistic comparisons. However, I cannot quite get my head around the interpretation of IRR.

I have looked at previous threads and answers posted by SandyHood, but these tend to deal with the actual mathematics. Can anyone explain in simple terms, what the percentage result actually means!

SandyHood

Leona
Sorry about the earlier mathematics.

You know what NPV is

NPV which shows the difference between total discounted cash flows and the initial cost, thus enabling a company to make realistic comparisons.

Your discounted cash flows are the result of a series of multiplication sums.

You multiply the actual annual net cash flows by the discount factor for that year.
Each discount factor depends on a rate and the year in question.
The higher the rate the more the net cash flow is reduced.

The IRR is the discount rate that will leave you with a zero NPV

And if you find your IRR is more than the companies own required return that signals that the project is worth investing in.
If it is lower it is not a worthwhile investment.

gingervicki

thanks very much

that makes much more sense - thanks very much:001_smile:

LEONa

Thanks

Ahhhhhh! Penny dropped! Thanks for that Sandy, you obviously know your stuff!