Internal rate of return
IRR is the return implied by a project's cash-flow timing. For conventional cash flows consisting of an initial outflow followed by inflows, accept an independent investment when its IRR exceeds the appropriate required return. It can be estimated by interpolating between nearby rates producing opposite-sign NPVs, although the NPV curve is not straight. Unconventional cash flows can produce multiple IRRs or no useful IRR. Scale and timing differences can make IRR rankings conflict with NPV for mutually exclusive projects; NPV measures the absolute value created at the required return.
Worked example
An outlay of $100 today returns $121 in two years. Setting −100 + 121/(1 + r)² = 0 gives (1 + r)² = 1.21 and IRR = 10%. At a required return of 8%, the project has a positive NPV and is financially acceptable under the assumptions.
Common mistake
Choosing the highest IRR automatically between mutually exclusive projects, even when another project creates more value.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |