Internal Rate of Return

Definition

The rate of return in a capital investment project which makes the Net Present Value equal to zero.

What It Means

The idea is to establish the rate of return on one’s investment at the beginning of the project, such as a business purchase. One then compares the Present Value of expected benefits to be received from the business against the value of the investment, such as the business purchase project costs.

The internal rate of return sets the of all the benefits expected to be received equal to the of the investments required. The benefit considered in valuing a small business for sale is an income stream such as the seller’s discretionary cash flow.