The Internal Rate of Return

This chapter demonstrates that discounting has a much wider scope than might have appeared to be the case in the simple financial mathematics. If net present value (NPV) is inversely proportional to the discounting rate, then there must exist a discounting rate that makes NPV equal to zero. The discounting rate that makes net present value equal to zero is called the internal rate of return (IRR) or yield to maturity. It is possible to use trial-and-error to determine IRR. This will result in an interest rate that gives a negative net present value and another that gives a positive net present value. Modified internal rate of return (MIRR) is the rate of return that yields an NPV of zero when the initial outlay is compared with the terminal value of the project's net cash flows reinvested at the required rate of return.