The internal rate of return
- Must be less than the interest rate if the firm is to invest rate if the firm is to invest
- Makes the present value of profits equal to the present value of costs.
- Falls as the annual yield of an investment rises.
- Is equal to the market interest rate for all the firm’s investment.
The internal rate of return ‘makes the present value of profits equal to the present value of costs’. The Internal Rate of Return is the interest rate that makes the Net Present Value zero.
Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.