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Internal Rate of Return - IRR

The internal rate of return (IRR) is a capital budgeting metric. IRR measures the profitability of potential investments. As used, the IRR makes the net present value of cash flows for a particular project equal to zero.

IRR is an iterative calculation, solved through trial and error or specific software. Why is IRR critical to valuations?

So many of the valuation engagements require a sanity check, particularly when the data inputs are vague or rather speculative. An unrealistic IRR can reveal flaws in the underlying analysis. In addition, the IRR is most useful in setting a range of discounts to support with the IRS. It is our lynchpin when facing an IRS audit or litigation.

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