Short definition: The internal rate of return (IRR) is a financial metric that measures the profitability of an investment.
Explanation: The IRR is the discount rate that makes the net present value (NPV) of all cash flows (both positive and negative) from a particular investment equal to zero. In other words, it is the annual rate of growth an investment is expected to generate.
Example: If an investment of $10,000 is expected to generate cash flows of $3,000 per year for five years, the IRR would be the discount rate that makes the present value of those cash flows equal to $10,000.
Additional information (optional): IRR is often used to compare the attractiveness of different investment opportunities. A higher IRR generally indicates a more profitable investment. However, it is important to note that IRR has limitations and should not be the sole basis for investment decisions.