The internal rate of return is the discount rate when the total present value of capital inflows is equal to the total present value of capital outflows and the net present value is equal to zero, that is, the discount rate is 0.

Internal Rate of Return (IRR) is the discount rate when the total present value of capital inflows is equal to the total present value of capital outflows and the net present value is equal to zero. If you do not use a computer, the internal rate of return needs to be calculated using several discount rates until you find the discount rate at which the net present value is equal to zero or close to zero. The internal rate of return is the rate of return that an investment aspires to achieve, and it is the discount rate that can make the net present value of the investment project equal to zero.

1. It is the rate of return that an investment aspires to achieve. The bigger the indicator, the better. Generally speaking, the project is feasible when the internal rate of return is greater than or equal to the benchmark rate of return. The sum of the discounted present values ??of the investment project's cash flows in each year is the project's net present value, and the discount rate when the net present value is zero is the project's internal rate of return. In project economic evaluation, depending on the level of analysis, the internal rate of return can be divided into financial internal rate of return (FIRR) and economic internal rate of return (EIRR).

2. At present, investment methods such as stocks, funds, gold, real estate, and futures have been familiar and used by many financial managers. However, many people's understanding of the effectiveness of investment is limited to the absolute amount of income, lacking scientific basis for judgment. For them, the internal rate of return (IRR) indicator is an indispensable tool.

3. Internal rate of return is a macro concept indicator. The most popular understanding is the ability of project investment income to withstand currency depreciation and inflation. For example, an internal rate of return of 10% means that the project can withstand a maximum currency depreciation of 10% or inflation of 10% each year during operation.

4. At the same time, the internal rate of return also indicates the ability to resist risks during the project operation. For example, an internal rate of return of 10% means that the maximum risk that the project can bear per year during the operation is 10%. In addition, if a loan is required for project operation, the internal rate of return can represent the maximum affordable interest rate. If loan interest is included in the project economic calculation, it represents the maximum increase in loan interest during future project operations.

5. For example, if the internal rate of return is based on 8%, and inflation is assumed to be around 8%. If it is equal to 8%, it means that when the project operation is completed, no money will be made except the "salary" earned by "oneself", but it is still feasible. If it is lower than 8%, it means that there is a high possibility of losing money when the project operation is completed. Because of inflation, the money you earn in the future may not be able to cover the cost of your investment. Projects with long payback periods are particularly important for the internal rate of return indicator. For example, the general investment recovery period for hotel construction is about 10-15 years, and the investment and operation period for large-scale tourism development is more than 50 years. This is the most popular and practical meaning of internal rate of return.