Glossary term
IRR (Internal Rate of Return)
IRR is the yearly rate of return that accounts for how much cash you invest, when it comes back and how large each payment is.
IRR turns a series of cash flows into one annual percentage. It treats money received sooner as worth more than money received later, so it reflects both the size and the timing of returns. The calculation sets the present value of all inflows equal to the initial investment, and it is normally done in a spreadsheet.
A project with steady distributions and an earlier sale usually shows a higher IRR than one that returns the same total cash later. This makes IRR useful for comparing deals with different hold periods.
IRR has limits. It depends on forecasts, and it can look high when a deal returns cash quickly even if the total profit is small. Read it alongside equity multiple and cash-on-cash return.
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