Internal Rate of Return: The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all future cash flows (inflows and outflows) to and from a particular investment equal zero.
- NPV is the net present value.
- I is the income stream amount (cash flows) for each year or period.
- N is the number of years or periods, starting with 0, which is the current period or year.
- R is the discount rate/IRR you are trying to calculate (assumed to be constant in the future).
Investors who are required to select and monitor investment managers should develop a basic understanding of investment statistics. Quantitative tools can provide you with good insight that you can use in your qualitative interviews with managers and when monitoring your investments.