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Calculate Investors' Internal Rate of Return (IRR)The Internal Rate of Return (IRR) is based on the NPV calculation. It is the discount rate at which the NPV is zero. Most spreadsheets have functions that help you calculate IRR from a cash flow. An Internal Rate of Return (IRR) Calculation
You can see how the investment that pays sooner has a higher IRR, even though the second investment pays more. One important point with IRR, as the two investments show, is that although they have equal NPV, they have very different IRRs. That's because the better one generates cash flow sooner. Another important IRR point is that venture capitalists expect very high IRR on new investments. In recent years venture capital funds have generated overall Rates of Return of 50-100% or better, meaning that the winning deals have to generate IRRs of 200% or better. That's a very high return.
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