- The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments.
- The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation).
- Higher a project’s internal rate of return, the more desirable it is to undertake the project. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.