I am new to money.SE so please forgive if this question is not in keeping with the norms of the site, and let me know how I can improve it.
I have a fundamental question about concept of internal rate of return (IRR). I just read the definition at Investopedia. As I understand it, we are supposing an investment where we know our initial outflow, and we have several projected inflows occurring at various points in the future. Then the IRR is the discount rate that would lead the net present value of the investment to be zero.
My question is about what the relevance of this number is, i.e. when people use it as a measure of the profitability of an investment, what do they think of it as telling them about the investment?
This much is clear to me: if the inflows are greater but occur on the same timeframe, then the IRR will be greater. But beyond that, the measure seems very indirect to me. If an investment claims a projected IRR of say 15%, this is not asserting that one is making %15 of anything in profit at any time, even on average, is it?
To sharpen the question:
I expect a measure called "rate of return" to mean something like "this is how much money, as a percentage of the investment, you can expect to make annually from the investment." When I attempt to undestand IRR in these terms, the best I have come up with is this:
"This investment has an IRR of 15%"
seems to me to mean the same thing as
"If there were a hypothetical money market account with a 15% interest rate, and I made the present investment, and reinvested the inflows from the investment into the money market account as they occurred, I would have the same amount of money in it at the end of everything as if I had just put the money in the money market account the whole time."
My questions are:
(A) Am I correct that the last paragraph is an accurate interpretation of the statement that the IRR is 15%?
(B) If I am, then since there is not really a 15% money market account, what do people think of this number as telling them about the investment?