What does the Internal Rate of Return (IRR) measure?

The Internal Rate of Return (IRR) is a financial metric predominantly used to evaluate the profitability of an investment. Specifically, it represents the discount rate at which the net present value (NPV) of an investment's cash inflows equals the net present value of its cash outflows. Essentially, IRR provides a way to assess the expected rate of growth an investment is projected to generate over its lifecycle. When comparing IRR to a company's required rate of return or to the cost of capital, investors can make informed decisions about whether an investment is worthwhile.

This metric is particularly valuable for assessing the feasibility of various investment opportunities and aids investors in prioritizing projects based on their potential returns. Using IRR allows stakeholders to gauge the efficiency at which invested resources are expected to yield profits, making it a crucial tool in capital budgeting and investment analysis in both traditional and ESG-focused contexts.

While the other options might relate to various aspects of sustainability or governance, none address the fundamental financial characterization that IRR provides as a measure of investment profitability.