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ROI
GUIDE
Sort projects into 'go' and `no-go' piles.
DEFINITION: The internal rate of return (IRR) is the discount rate that results in a net present value of zero for a series of future cash flaws.
WHAT IT MEANS: It's a cutoff rate of return; avoid an investment or project if its IRR is less than your cost of capital or minimum desired rate of return.
STRENGTHS: It provides a simple hurdle rate for investment decision-making. It's the method favored by many accountants and finance people, possibly the ones at your company.
WEAKNESSES: it's not as easy to understand as some measures and not as easy to compute (even Excel uses approximations). Computational anomalies can produce misleading results, particularly with regard to reinvestments.
IRR is the flip side of net present value (NPV) and is based on the same principles and the same math. NPV shows the value of a stream of future cash flows discounted back to the present by some percentage that represents the minimum desired rate...