MBACalculator.com Internal Rate of Return using Goalseek

The internal rate of return (IRR) is a capital budgeting metric used by firms to decide whether they should make investments. It is also called discounted cash flow rate of return (DCFROR) or rate of return (ROR).[1] It is an indicator of the efficiency or quality of an investment, as opposed to net present value (NPV), which indicates value or magnitude.

The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e., the yield on the investment. Put another way, the internal rate of return for an investment is the discount rate that makes the net present value of the investment's income stream total to zero.

Another definition of IRR is the interest rate received for an investment consisting of payments and income that occur at regular periods.[2]

A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments of equal risk (investing in other projects, buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to any alternate costs of capital including an appropriate risk premium.

In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the project will add value for the company.

In the context of savings and loans the IRR is also called effective interest rate.