The internal rate of return (IRR) method is a process of dynamic capital budgeting and therefore supports evaluation and comparison of different investment alternatives. It’s the standard form of measuring the performance of private equity funds, as these are associated with frequent deposits and withdrawals. The IRR refers to the yield of a cash flow. The higher the internal rate of return is, the more advantageous the investment. However, the return value refers exclusively to the tied-up capital as a calculation base. For that reason and because the IRR method can indicate higher earnings, it’s different from other traditional methods of calculating return on investment. Due to these differences, return values like these cannot be compared directly. The internal rate of return should therefore not be the only comparison criterion, as private investors could otherwise have unrealistic yield expectations.
