Negative IRR definition
/What is Negative IRR?
Negative IRR occurs when the aggregate amount of cash flows caused by an investment is less than the amount of the initial investment. In this case, the investing entity will experience a negative return on its investment. This concept is most commonly found at the financial analysis stage of a capital investment, where the projected cash flows of a proposed investment are examined. A business that calculates a negative IRR for a prospective investment should not make the investment, unless there is a strong strategic reason for doing so.
IRR stands for internal rate of return, which is the discount rate that, when applied to a series of cash flows, would result in a present value that matches the amount of the initial investment.
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FAQs
Is a Negative IRR Always Bad?
A negative IRR typically indicates that a project will generate less than the initial investment, leading to a financial loss, which is usually considered undesirable. However, in some cases, such as compliance projects, environmental initiatives, or strategic investments, a negative IRR may be acceptable if non-financial benefits are achieved. While it signals poor financial performance, context and broader objectives may justify proceeding with the investment.
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