Internal Rate of Return (IRR) is a financial metric that is used to evaluate the profitability of an investment or project. It is a measure of the rate of return that is expected on an investment, expressed as a percentage. The IRR is the discount rate that makes the net present value (NPV) of an investment equal to zero.
To calculate the IRR, you need to know the initial investment, the cash flows expected from the investment over time, and the required rate of return (also known as the discount rate). The IRR is the rate at which the NPV of the investment equals zero.
Here is the formula for calculating IRR:
IRR = (1 + x)^(1/n) - 1
Where x is the discount rate that makes the NPV of the investment equal to zero, and n is the number of periods over which the investment will be held.
IRR is often used to compare different investment opportunities and to decide which one is the most attractive. For example, if you are considering investing in two different projects, you can use IRR to determine which one is likely to provide the highest rate of return. In general, an investment with a higher IRR is considered to be more attractive than an investment with a lower IRR.
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