HBR Guide to Building Your Business Case by Raymond Sheen

Author:Raymond Sheen
Language: eng
Format: epub
Publisher: Harvard Business Review Press
Published: 2015-05-14T04:00:00+00:00

Internal Rate of Return (IRR)

Internal rate of return (IRR) shows a project’s investment value. It essentially tells you what rate of return you would get if you invested the same amount of money in a CD that performed as well as your project.

If the IRR is small, you shouldn’t do the project—there are better ways to spend your money. If it’s large, you have a good shot at approval (as with NPV, the greater the rate, the greater the benefit). Finance experts often use this technique to determine whether it’s worth borrowing money for a project. Bankers will want to know the return rate on the money they lend, to make sure your company can pay back the interest and principal.

Entrepreneurs, take note: Investors often want to understand the IRR in the same way that bankers do. The rate of return indicates what they can expect to receive from their investment when they cash out.

Here’s the calculation:

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