What is an IRR?

IRR or Internal rate of return is the discount rate that will equate future cash inflows to the initial cash outflow or the investment value. Let’s work with a case study.

Assuming a PE company invested £100m in a company which gave dividends of £5m a year for five years and was sold after for £200m

The IRR (r) is the discount rate which will equate £100m to all the cash inflows i.e. £5m a year for five years and £200m.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

-£100 £5 £5 £5 £5 £205

(1+r)^1 (1+r)^2 (1+r)^3 (1+r)^4 (1+r)^5

The IRR in the above case is 19%

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