What does a higher IRR typically indicate about an investment?

A higher Internal Rate of Return (IRR) typically indicates a higher expected return on an investment. IRR is a metric used to evaluate the profitability of an investment; it represents the annualized rate of return that makes the net present value (NPV) of all cash flows (both incoming and outgoing) from the investment equal to zero.

When the IRR is higher, it suggests that the investment is expected to generate greater returns relative to its costs over time, assuming all other factors are constant. Investors often use IRR to compare the profitability of various investment opportunities. A higher IRR can be attractive because it implies that the investment will yield more value compared to other alternatives or benchmarks, potentially compensating for the risks taken.

In contrast, the other options are less directly related to the implication of a higher IRR. For instance, a higher IRR does not necessarily indicate lower risk or a longer investment horizon, nor does it correlate with increased liquidity. These factors can vary independently of the expected returns represented by the IRR.