ABSTRACT
This chapter contains internal rate of return; the principles on which it is based; underlying assumptions; guidance on application, and relevant issues; and related models. Internal rate of return (IRR) is the earning rate of the capital sum to be expended at which the net present value (NPV) is zero. Capital expenditure projects calculated to give an IRR in excess of current or target interest rates are attractive. IRR equals the discount rate at which the present value of all future cash flows is equal to the cost of the capital expenditure or project. An attractive internal rate of return alone may be insufficient justification for the capital project to proceed. The IRR is usually found by trial and error using different percentage return/NPV tables until a near zero percentage is reached. The model helps with capital expenditure appraisal and aids considerations of risk and return.
