The internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that gives it a NPV of 0, or where the sum of discounted cash flow is equal to the investment. The IRR is calculated by trial and error. IRR is the best method to evaluate the economic side of an investment, because it allows a good comparison with other investment projects and financial alternatives (bank account, stocks, real estate) (Gessinger, 2009).
According to Nick Sundish, “IRR, or the Internal Rate of Return, is a financial metric that is commonly used to evaluate the profitability of potential investments. In the context of mining projects, IRR plays a crucial role in determining whether a project is economically viable or not.
In simple terms, IRR represents the annualized percentage return that investors can expect to receive from their investment in a mining project. It takes into account the initial investment, as well as the future cash flows generated by the project, and calculates the rate of return that makes these two values equal.
IRR is often used in conjunction with other financial metrics such as NPV (Net Present Value) and Payback Period, but it provides a more comprehensive understanding of the profitability of a project. It takes into consideration the time value of money, and allows for easy comparison between projects with different timeline.”
“Mining projects are usually 15% IRR, unless it is a brownfields development, with some existing infrastructure. If it exceeds 30% IRR of a conventional oil field, it may be too good to be true.“ Campbell Mackey says.
Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering (Mirakovski et al., 2009).
IRR is ideal for analyzing capital budgeting projects to understand and compare potential rates of annual return over time. In addition to being used by companies to determine which capital projects to use, IRR can help investors determine the investment return of various assets.
Reference
Gessinger, G. H. (2009). CHAPTER 7—Financial Management of a Company. In G. H. Gessinger (Ed.), Materials and Innovative Product Development (pp. 139–180). Butterworth-Heinemann. https://doi.org/10.1016/B978-1-85617-559-3.00007-7
Mirakovski, D., Krstev, B., Krstev, A., & Petrovski, F. (2009, October 1). Mine project evaluation techniques. https://www.semanticscholar.org/paper/Mine-project-evaluation-techniques-Mirakovski-Krstev/f5ba4d2e7037b0e79d77fc6a7f0932bc3eb263e7
