Internal rate of return

The internal rate of return is another measure used to compare one project with another. Calculating it is similar to working out the discounted cash flow, but in reverse. For example, the project yields $36,206.90 based on a discount factor of 6%. A discount factor of 200% would give a yield of -$1,237.41, a negative figure. Somewhere in between these negative and positive figures is a discount factor that would give a zero net present value, in this case, roughly 150%. This is the internal rate of return. Put another way, if all the money that was invested in this project had been borrowed, and the project broke even, the interest rate paid on that borrowed money would be the internal rate of return.

As a rule of thumb, the higher the internal rate of return the better. However, it fails to take into account the size of the project. One with a relatively low investment may have the same internal rate of return as one worth many times more.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook


Post a comment