The IRR is the discount rate that makes a project or investment's Net Present Value (NPV) equal to zero.
For instance, consider a renewable energy company evaluating a project that requires an initial investment of $200,000, with expected annual cash flows of $50,000 over the next six years.
To determine the IRR for this project, the NPV is computed for different rates on a trial-and-error basis using a financial calculator or an Excel spreadsheet.
Based on these projected cash flows, if the company proceeds with the investment, it can expect an annual return of 12.978%.
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