The so-called internal rate of return refers to the discount rate that can make the present value of future cash inflows equal to the present value of future cash flows, or make the net present value of investment schemes zero. Internal rate of return method is a method to evaluate the advantages and disadvantages of the scheme according to the internal rate of return of the scheme itself.

Discount rate when cumulative net present value is 0. This internal rate of return means the ratio of the maximum currency depreciation that the project can bear. (profit margin, ability to resist risks. ) or in the above example, suppose the discount rate is now 20%, and now calculate the net present value of project A and project B as follows:

It can be seen that the NPV of project A is negative at this time, while the NPV of project B is still positive, which indicates that the IRR of project A will be less than 20%, while the IRR of project B will be greater than 20%, because IRR is the discount rate when NPV is 0. We finally calculated that when the discount rate is 18.45%, the net present value of Project A is exactly equal to 0, as shown in the following table:

At this point, we say that the IRR of Project A is 18.45%.

From the above, we can see that the net present value (NPV) refers to how much money we can earn during the project period when the time value of money (inflation depreciation) is considered, and the internal rate of return (IRR) refers to the maximum rate of currency depreciation we can bear during the project period when the time value of money (inflation depreciation) is considered. More generally, this means that if we invest in this project with a loan, we can bear the highest annual interest rate.