Internal Rate of Return - IRR

A primary measure of an investments worth (or value) is based on yield and known as the internal rate of return - IRR .

The internal rate of return can be defined as the break-even interest rate which equals the Net Present Worth - NPW - (Net Present Value) of a project in and out cash flows.

P i_rr = F_{cash_in} - F_{cash_out}

= 0                    (1)

where

P = Present Worth (Value)

i_rr = internal rate of return

F_{cash_in} = future cash flow in ( discounted)

F_{cash_out} = future cash flow out ( discounted)

(1) can be expressed as

P i_rr = F₀ / (1 + i_rr )⁰ + F₁ / (1 + i_rr )¹ + F₂ / (1 + i_rr )²+ .... + F_n  / (1 + i_rr )ⁿ = 0              (2)

where

F_0..n = cash flow in period 0 to n (positive value for cash flow in - negative value for cash flow out)

For a given cash flow equation (2) can be solved by iteration.

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Minimum Attractive Rate of Return - MARR

Minimum Attractive Rate of Return - MARR - represents the required or minimum acceptable Internal Rate of Return for a project investment.