Method Four: Financial Models - Internal Rate of Return

Internal rate of return (IRR) is an alternative method for evaluating the expected income and outlays associated with a new project-investment opportunity. Under this model, the project must meet some internal organizational hurdle rate required of all projects prior to their investment. Without going through the mathematics of the process in detail, the IRR is the discount rate that equates the present values of the revenue and expense streams for a project. Assuming a project has a lifetime of t, the IRR would be the rate that equates:

I0 +	I1	+	I2	+ ... +	It	= R0 +	R1	+	R2	+ ... +	Rt
	(1 + k)		(1 + k)2		(1 + k)t		(1 + k)		(1 + k)2		(1 + k) t

IRR (represented by the value k) is found through a process of trial and error.