Financial Mathematics → Internal Rate of Return

The internal rate of return (IRR) or the discounted cash flow rate of return is the rate of return that makes Net Present Value (NPV) is equal to zero.

Example 1.
An investor is considering a project which requires an outlay of 3 million pounds initially, and another outlay of one million pounds after one year. After two years time, when the project ends, he expects an inflow of 4.5 million pounds. What is the internal rate of return (IRR) of this project?

Solution
The Internal Rate of Return makes the NPV = 0. So,

Q. Is the above investment profitable?
Now, assume that the investor can lend and borrow at the same fixed rate of 7.13% per annum. Then the above investment is profitable or not?

Answer
Since the rate of return in the above investment (example 1) is 6.93% but the investor can lend and borrow at 7.13%. So, the above investment is NOT profitable.