Internal rate of return is a method of analyzing potential capital investments by subtracting the present value of expected returns from the amount invested.
If a company desires a rate of return of 8%, they would find the net present value of the expected returns using an interest rate of 8%. Let’s say the present value turned out to be $40,000 and the investment costs $35,000. $40,000 -$35,000 equals a positive number, $5,000. This means the investment is yielding more than the required 8% and the company should invest.