5F.2
2. What is the IRR (explain what it
measures)? [5]
The IRR is the Internal Rate of Return. It is the one discount rate, when applied to all cashflows, that produces a zero NPV. You can think of it as the return on investment that just makes the project a break-even investment. In general, it provides one measure of the return that the project generates. In practice, this return is compared to an appropriately chosen required rate of return to make the decision of whether to take the project. We know from class, however, that this method is fraught with pitfalls.