Internal Rate of Return (IRR)

this same concept is involved in capital budgeting when we calculate a project’s internal rate of
return (IRR): A project’s IRR is the discount rate that forces the PV of its inflows to equal its cost.

To calculate the IRR, we begin with Equation 11.1 for the NPV, replace r in the denominator with the
term IRR, and set the NPV equal to zero.

We could use a trial-and-error procedure—try a discount rate, see if the equation solves to zero, and
if it doesn’t, try a different rate.

We could then continue until we found the rate that forces the NPV to zero; that rate would be the
IRR.