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Link to the detailed video on IRR:    • Internal Rate of Return With Excel Calcula...  

Internal Rate of Return With Excel Calculation | IRR | Determining the Rate of Return

Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of an investment or project. It is the discount rate that makes the Net Present Value (NPV) of all future cash flows from a particular project equal to zero. In other words, it represents the rate of return at which the present value of the inflows (returns or revenue) equals the present value of the outflows (costs or investments).
Interpretation:
The IRR of 9% means that the project is expected to return 9% annually over the three years.
If the company has a required rate of return (or cost of capital) of 5%, then the project is a good investment because the IRR (9%) exceeds the cost of capital (5%).
If the IRR were less than the required rate of return, the project would not be attractive.

Key Points:
IRR greater than Cost of Capital: The project is considered good since it is expected to generate returns higher than the company's required rate of return.
IRR less than Cost of Capital: The project may not be worthwhile, as it is not expected to generate sufficient returns.
IRR = Cost of Capital: The project breaks even in terms of profitability.
Limitations of IRR:
Multiple IRRs: If the project has alternating positive and negative cash flows, it may have multiple IRRs, making interpretation difficult.
Assumes reinvestment at IRR: IRR assumes that future cash flows are reinvested at the same rate, which may not always be realistic.
Scale of Investment: IRR doesn't account for the size of the investment. A smaller project with a high IRR might still generate less overall value than a larger project with a lower IRR.

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