Meaning of IRR
Internal rate of return is the estimated annual rate of return a project is expected to generate. It is the rate at which the present value of future cash flows equals the initial investment. IRR is used to evaluate the profitability of long-term projects.
- Measures how fast the investment grows each year
- Useful for comparing multiple projects
- Accounts for the time value of money
IRR for the Project
Based on an investment of three crore and expected yearly profit of seventy lakh over five years, the internal rate of return falls in a strong range. It reflects the consistent performance and earning capacity of the project.
- Total investment: three crore
- Yearly cash flow: seventy lakh
- Estimated IRR: between seventeen and twenty percent
Importance of IRR
A higher IRR means the project is more profitable and efficient. If IRR is greater than the expected return or cost of capital, the investment is considered good. It helps in deciding whether to proceed with or reject a project.
- Helps measure long-term financial success
- Assists in ranking investment choices
- Works well for real estate and industrial projects