We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Are the Advantages of Internal Rate of Return?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 4,471
References
Share

An internal rate of return is a financial calculation that has to do with the anticipated growth or return that some type of internal project can reasonably be expected to generate. A projection of this type is often prepared before a project is actually approved and launched, serving as part of the motivation for devoting resources to the effort. There are several advantages of internal rate of return projections, including the ability to sell the project to the powers that be and have a chance to actually meet or exceed that projected return.

One of the key advantages of internal rate of return is that this calculation can be used to justify the expenses associated with a project. By demonstrating that the total revenue generated from the project within a specified period of time will exceed the costs of launching and continuing a project, it is possible to gain and maintain support for the project. Since a rate of return (ROR) is usually expressed in terms of a percentage, using reliable and verifiable data to show the project will, within a given amount of time, post an internal rate of return that is considered equitable helps to increase the chances of getting the project off the ground.

Another of the advantages of internal rate of return is the ability to set a goal that can be used to measure the forward movement of the project, in terms of revenue generation. Under the best of circumstances, the project progresses on schedule and begins to generate revenue at a steady pace, making it possible to demonstrate that the projected return is highly likely to occur within the specified time frame. In cases where the project’s performance exceeds expectations, this may mean that the project managers can announce to investors that the projected rate of return is reached early in the period, which in turn means the actual rate of return at the end of the period will exceed the originally projected internal rate of return.

Since the advantages of internal rate of return projections have to do with both the pre-launch phase of a project and also as a measurement tool during the project, it is important to make sure the return projection is based solidly on fact and not on hope or intuition. Doing so helps to increase the chances of having the final rate of return at least match that initial return projection, and also sets the stage for possibly going beyond that percentage. While very helpful, it is only possible to enjoy the advantages of internal rate of return if that projected return is accurately forecasted. Otherwise, there is a good chance the actual returns will be somewhat disappointing, possibly leading to the cancellation of the project.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-are-the-advantages-of-internal-rate-of-return.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.