The Internal Rate of Return (IRR) is a rate of return widely used capital budgeting and is frequently used to determine if a given project is worthwhile. It refers to the discount rate at which the net present value of a stream of payments/incomes is equal to zero. A project or investment is considered acceptable if its Internal Rate of Return exceeds the cost of capital. Conversely a project or investment should be rejected if the cost of capital exceeds this rate. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.
The formula of IRR is given by:
IRR = CFo + CF1/(1+r)^1 + CF2/(1+r)^2 +…….+CFn/(1+r)^n