Internal Rate of Return(IRR)

 Internal rate of return (IRR) is a metric that evaluates the average annual return that a potential investment asset will generate over time in the life cycle of the investment; it equates the current value of an investment’s cash outflows with the present value of the investment’s cash inflows. IRR is the degree of growth and profitability that a real estate property is estimated to generate, expressed as a percentage.

 

IRR is the discount rate at which the net present value (NPV) of all of an asset’s cash flows is equal to zero. It uses the time value metric of money metric which helps deduce the actual rate of earning from an investment.

 

Often, the actual rate of return of a project differs from its projected IRR rate. Nevertheless, it is helpful in analyzing any investment opportunity and is also compared against the prevailing rates of return in the securities market.

 

The calculation of IRR is derived from the following formula: (NPV is set as 0)

0=NPV=t=1∑T​(1+IRR) tCt​​C0

​                                where:

 Ct​=Net cash inflow during the period

      tC0​=Total initial investment costs

IRR=The internal rate of return

t=The number of time periods​

 

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