IRR - Internal Rate of Return
IRR stands for internal rate of return. The IRR is
- a percentage number that
- quantifies the profitability of financial investments and
- allows comparing investments with different cash flow characteristics
Comparing investment different with different cash flow characteristics is a challenge. For example, different time to maturity, redemption features, nominal interest rates, etc., result in different cash flows which cannot be compared directly.
The internal rate of return is the percentage number that makes the sum of the discounted cash flows equal to the purchase price.
Often it is also called ROI, return on investment.