# What is a good IRR rate

### IRR / internal rate of return

The internal rate of return, also known as the IRR, is a way of calculating the return on investments. The abbreviation IRR is derived from English and stands for boarding rate of return. It simply means that the interest is calculated according to the capital tied up in the investment, which often results in a more realistic interest rate than with the “normal” interest calculation. In capital investments, the internal rate of return is used as the most common type of return calculation, although there are other options here.

This calculation is particularly useful for systems in which sudden and frequent changes in the tied capital occur. If, for example, a certain amount is invested and from this the investor receives annual interest income that is just as high as the actual interest income, the capital tied up remains the same. However, if the distribution is only made at the end of the term, the tied capital increases by the amount of interest. This often results in a lower return, calculated according to the IRR. However, if higher interest income is distributed annually than actually accrued, the capital actually tied up in the investment is reduced. However, according to the IRR calculation, this ultimately results in a higher return for the individual years.

It can thus be said that the internal rate of return can better describe the actual return on an investment on average over an observation period, often several years, than the “normal” return calculation. But this only applies to investments that have constantly changing bound capital. The IRR therefore takes into account that capital payments, tax results and distributions occur at different times. This is guaranteed by the assumption of the current capital stock in the plant.

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