What is the definition of IRR?

The internal rate of return (IRR) is defined as the discount rate that makes the net present value (NPV) of an investment equal to zero. In other words, it is the rate at which the present value of the expected cash inflows equals the present value of the expected cash outflows. This is an important concept in finance as it reflects the profitability of potential investments.

When calculating IRR, investors often seek to determine the rate at which they will break even on their investment. A project or investment is generally considered attractive if its IRR exceeds the required rate of return or the cost of capital. Thus, IRR serves as a crucial tool for comparing the profitability of different investments or projects, allowing for informed decision-making.

The other definitions presented do not capture the essence of IRR. For instance, average cash flow does not account for the time value of money, which is central to the concept of IRR. Similarly, net profit divided by the initial investment presents a simple return metric rather than a time-sensitive measure like IRR. Lastly, the annualized percentage growth of investment provides useful data about growth but does not reflect the specific yield at which the investment's NPV equals zero. These distinctions highlight why the definition provided