Internal rate of return
Draft definition. Technical and editorial approval pending.
The discount rate at which a series of dated cash flows nets to zero. IRR accounts for the timing and magnitude of every inflow and outflow. A single-period ratio of surplus to invested cash is a different and simpler measure, and describing that ratio as an IRR overstates what the underlying calculation actually supports.
In practice
A fictional first-year surplus of 90,000 USD on an opening cash contribution of 2,980,000 USD is about 3.02 percent. That is a single-period ratio under constant averages with no dated cash-flow model, despite replenishment being assumed to maintain balances. It is not an IRR and should not be presented to investors as one.
Read this in context: Warehouse Worked Example.