The internal rate of return on an investment or project is the "annualized effective compounded

return rate" or rate of return that sets the net present value of all cash flows (both positive and
negative) from the investment equal to zero. Equivalently, it is the discount rate at which the net
present value of the future cash flows is equal to the initial investment, and it is also the discount
rate at which the total present value of costs (negative cash flows) equals the total present value
of the benefits (positive cash flows).
Speaking intuitively, IRR is designed to account for the time preference of money and
investments. A given return on investment received at a given time is worth more than the same
return received at a later time, so the latter would yield a lower IRR than the former, if all other
factors are equal. A fixed income investment in which money is deposited once, interest on this
deposit is paid to the investor at a specified interest rate every time period, and the original
deposit neither increases nor decreases, would have an IRR equal to the specified interest rate.
An investment which has the same total returns as the preceding investment, but delays returns
for one or more time periods, would have a lower IRR.