BUSINESS SPEAK · IRR
IRR: Internal rate of return
The yearly return a deal really earns, counting when the cash arrives.
What it means
IRR is the one yearly rate at which everything you get back, shrunk to today’s money, exactly equals what you put in. If IRR beats the minimum return you want, the deal is worth considering.
Where you’ll meet it
- Investors use IRR to compare property, equipment or business deals that pay back unevenly over several years.
- It assumes cash received can be reinvested at the same rate, so very high IRRs can flatter short deals.
Worked example
Scenario: You pay 10,000 today and get 6,000 back at the end of each of the next 2 years.
- Total back: 12,000, but spread over time
- Try 13%: 6,000 ÷ 1.13 + 6,000 ÷ 1.13² ≈ 10,009
- That is almost exactly the 10,000 paid
Answer: IRR is about 13% a year.