Abstract: Defined mathematically, the internal rate of return (IRR) of a cash-flow stream is the discount rate at which its net present value is 0. What is the significance or meaning of such a measure? Using simple example problems and illustrative calculations, the author explains a technically correct but, at the same time, intuitively meaningful interpretation of IRR. The mathematical insights gained include a clear understanding of how multiple IRRs occur and of how investment decisions based on net present value are reconcilable with two or more observed IRRs.

Keywords: internal rate of return, net present value, multiple internal rates of return

JEL codes: A2, ...