Internal rate of return
The rate at which the present value of a project's flows equals the investment: the return built into the project itself.
Formula
\sum_{t} \frac{CF_t}{(1 + IRR)^t} = I_0Solved numerically — the measure has no closed form. Flows must be taken over equal periods, or the result carries no annual meaning.
How to read the number
Convenient because it compares directly with the cost of capital: the project is worth doing when it clears that bar.
When the metric lies
With alternating inflows and outflows there can be several solutions, and comparing projects of different size by it misleads: a ratio does not replace an amount.
Also known as: irr