Internal rate of return

The internal rate of return (IRR) is the discount rate at which a project's NPV equals zero — the break-even return the project earns. Accept when IRR exceeds the required rate of return.

ByHoang TruongUpdated June 30, 2026

FrameworkDCF investment appraisal

See it move

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As the discount rate used to evaluate a project rises, its net present value falls along a downward line. The internal rate of return is the discount rate at which that line crosses zero — the project's break-even return. A project is accepted when its IRR exceeds the firm's hurdle rate, such as its WACC.

Where it fits

TopicCapital Budgeting & Investment AppraisalCoreSubjectCorporate FinanceCore

The formula

LaTeX

0 = \sum_{t=1}^{n} \frac{CF_t}{(1+IRR)^t} - C_0

Variables

$I R R$: Internal rate of return (decimal)
$C F_{t}$: Net cash flow in period t (€)
$t$: Period number (periods)
$C_{0}$: Initial investment (€)

IRR is the rate that makes NPV exactly zero; found numerically. Accept when IRR exceeds the hurdle rate.

Check yourself

PracticeCORE

A project has an internal rate of return (IRR) of 11%. The firm's weighted average cost of capital is 13%. Which conclusion is correct under the IRR decision rule?

Select an answer to check your understanding.