Net Internal Rate Of Return

Last updated: March 21, 2024

What Does Net Internal Rate Of Return Mean?

The net internal rate of return (IRR) is a financial metric that is used to measure an investment’s quality or yield by providing its expected rate of return. It is defined as the rate at which the net present value of the negative cash flows equal the net present value of the positive cash flows.


Divestopedia Explains Net Internal Rate Of Return

The international rate of return (IRR) is used in capital budgeting. It adds a time dimension to cash flows by taking into account how long the capital was put to work to generate the return on investment. Therefore, IRR represents the effective interest rate. A project is considered viable if its IRR is greater than the minimum acceptable rate of return. It is called an internal rate of return because it does not consider the effects of factors such as inflation or interest rates.

Most investments employ a manager to manage funds and generate returns, then pay a specified fee to that manager. There are other operational costs as well. Net IRR is the return after accounting for such fees and costs.

Net IRR is a commonly used measuring tool for analyzing private equity investment projects that need cash investments in several stages, but generate only one single cash outflow at the end of the project (in the form of an IPO, merger or acquisition). If the net present value of the investment is equal to the net present value of benefits, or is greater than the acceptable rate of return, then the project is profitable. In the case of two projects with the same net IRR, the project with a smaller time frame is considered to be the better option.


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