Definition of rate of return

The internal rate of return on an investment or potential investment is the annualized effective compounded return rate that can be earned on the invested capital.

In more familiar terms, the IRR of an investment is the interest rate at which the costs of the investment lead to the benefits of the investment. This means that all gains from the investment are inherent to the time value of money and that the investment has a zero net present value at this interest rate.