Project Selection – Internal Rate of Return

internal rate of return

Definition

This is one of the most, if not the most, important metric that the Project Manager should be looking at because other stakeholders will definitely be doing so.

To understand Internal Rate of Return (IRR), think of the amount of money the project will return to the sponsoring company. In other words, it is about how much money a project is making the company. IRR is a ‘rate’ so it is mostly expressed as a percentage.

A more complex definition (that you don’t have to understand) is,

Internal rate of return (IRR) is the interest rate at which the cash inflow and cash outflow of the project equals zero.

Sample Question

There are three projects for you to choose from: Project A has an internal rate of return of 15%, Project B 20% while Project C -20%. Based on the information provided, which is the best project?

A. Project A
B. Project B
C. Project C
D. Not enough information provided

Solution: B

Higher the better

The larger the IRR, the more favorable the project financially is to the organization.

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