Return on Software: Maximizing the Return on Your Software Investment

Internal Rate of Return, IRR

PW(i), FW(i), and AE(i) all express the cash-flow stream as an equivalent dollar amount in some time frame. In contrast, the internal rate of return, IRR, expresses the cash-flow stream in terms of an interest rate. Technically, the IRR is the interest rate that causes the present worth of the expenses to equal the present worth of the income. It's exactly the “critical i” that brings the PW(i) to zero, as shown above in Figure 8.2. In plain English, this means that if you mimic the proposal's cash-flow stream at a bank (i.e., you deposit exactly those same payments and withdraw exactly those same receipts at exactly those same times), the IRR is the interest rate that the bank has to pay for you to end up with a ...