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I am coming from a more accounting background and I always understood as IRR to be a discount rate that would lead to an NPV of a project to zero. That is to say that IRR is how much value money loses over time. The higher the IRR, the less you should pursue the project.

Yet, reading some VC articles, IRR seems to represent the return of the project and the higher is better. I seem to be missing the understanding of IRR.

Is it saying that given an initial investment and future cash flows, your money would need to lose x% (the IRR)to have an NPV of zero. Therefore, the bigger it is, the further that possibility is and therefore the better the project?

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  • "That is to say that IRR is how much value money loses over time. The higher the IRR, the less you should pursue the project." This is an incorrect interpretation. The higher the IRR, the more you should pursue the project. This is true even in accounting.
    – D Stanley
    Dec 27, 2021 at 15:12
  • If the IRR is higher than prevailing interest rates, it means that you're beating inflation (which is possibly where your interpretation of discount rate as inflation rate comes from). If the IRR is higher than your cost of funds (at what rate could you borrow money) then you could profit by borrowing the money to fund the project (ignoring risk, of course)
    – D Stanley
    Dec 27, 2021 at 15:13

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As a "variety of money-weighted rate of return", the higher the return the better.

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https://en.wikipedia.org/wiki/Rate_of_return#Internal_rate_of_return

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  • Yes, I know that. What I dont understand is why?
    – user1234
    Dec 26, 2021 at 9:18
  • This is incorrect: "That is to say that IRR is how much value money loses over time." Division by (1 + r)^t discounts a future value to a present value, but the future values remain larger than the present value for positive r. The IRR above discounts toward the past for NPV. An IRR could also be written to appreciate toward the future for NFV, i.e. NFV = Σ Ct (1 + r)^k = 0 e.g. A total of 20.748 resulting from regular deposits of 4, thusly : -20.748 (1 + r)^0 + 4 (1 + 0.3)^1 + 4 (1 + 0.3)^2 + 4 (1 + 0.3)^3 = 0
    – Chris Degnen
    Dec 26, 2021 at 10:32
  • The IRR to NPV can be used for the repayment of a loan. E.g. a loan of 7.26445 present value repaid in 3 repayments of 4 in future value : -7.26445/(1 + 0.3)^0 + 4/(1 + 0.3)^1 + 4/(1 + 0.3)^2 + 4/(1 + 0.3)^3 = 0
    – Chris Degnen
    Dec 26, 2021 at 10:43

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