Internal rate of return
The discount rate at which a project's net present value is zero. It says at what rate the project pays, not how much value it adds.
Where you will meet it
Internal rate of return appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Contrast money-weighted with time-weighted rates of return
“A money-weighted return is the internal rate of return of the portfolio's cash flows, so it is affected by when the investor added or withdrew money.”
- Differentiate the internal rate of return and time-weighted return when applied to alternatives
“The money-weighted internal rate of return is therefore the appropriate measure there.”
- Work out a project's internal rate of return and net present value, and explain each
“The internal rate of return is the discount rate at which NPV is zero.”
- Discuss what to watch when overseeing an alternatives programme after it is in place
“Performance should be measured with money-weighted measures such as internal rate of return or public market equivalents for private funds, because managers control cash flow timing, and early results suffer from the J-curve.”
See also
Discount rate · Net present value · Present value
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