What is IRR?

IRR, which stands for internal rate of return, is the expected rate of return for a project or investment. This is a common capital budgeting method used to evaluate potential profitability.

In determining whether a project or investment should be pursued using the IRR method, the value computed must be compared to the required rate of return (RRR), which is a minimum acceptable rate that a company or investor deems enough to cover the risks of a project or investment.

It's assumed that a business endeavor with a higher IRR than its RRR will be profitable. Therefore, as long as the IRR is greater than the RRR and is within the investor or company's budget, the implementation of a project can be justified. However, it's still best for an investor to use other capital budgeting methods and consider other external factors alongside the IRR method to ensure a more sound business decision.