What is Project IRR

Project IRR (internal rate of return) is a rate of return used in project budgeting to measure and compare the profitability of investments: it is the average annual return earned through the life of a project, showing a comparative appraisal of investment proposals where the flow of income varies over time, so it derives the rate of growth that a project is expected to generate (true annual rate of earnings on an investment). It is the discount rate at which the net present value of negative cash flows in the project equals the net present value of the positive cash flows in the project. It is called internal refers because its calculation doesn’t incorporate environmental factors like inflation. As far as the project IRR is a rate, it is used as an indicator of the efficiency or yield of a project. 

Other names of this method are the discounted cash flow rate of return or the rate of return (ROR). An advantage of the IRR method is that it considers the time value of money. Internal rates of return are utilized to analyze the advisability of making investments into projects. The higher IRR a project has, the more advisable it is to undertake the project (the more beneficial it is). If several projects demand the same amount of up-front investment, the project with the highest IRR will be considered as the most worthwhile and it will be launched at first place.

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