I think you were right first time. I believe IRR stands for Internal Rate of Return. This is method of financial analysis by which accountants justify withholding money from engineers, who simply want to spend it on fun and interesting projects.
Naturally, the accountants will not tell you how they work this out - otherwise they won't be able to bamboozle you into not having your project funds !!
Seriously, there is an IRR function in MS Excel, that explains in simple terms what it is used for.
Roughly speaking: Model the net present worth of all the expected costs and savings as a function of unknown interest rate (time value of money). Solve for the interest rate necessary to make net present worth=0. That is the IRR. (Roughly speaking)
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To be technical about it, it's the interest rate that makes net present value of all cash flow equal zero.
IRR is defined by the equation:
[tt]
NPV(C, t, IRR) = 0
where,
N
NPV(C, t, d) = Sum C/(1+d)^t
i=0
[/tt]
C is the i-th cash flow (C[0] is the first, C[N] is the last).
d is the assumed discount rate.
t is the time between the first cash flow and the i-th. Obviously, t[0]=0 and t[N]=the length of time under consideration. Pick whatever units of time you like, but remember that IRR will end up being rate of return per chosen time unit.
Comment: Mathematically, the internal rate of return is the discount rate at which the present value of the cost stream (including both original investments and subsequent costs) equals to the present value of the revenue stream.
Reference:
Donald G. Fink, H. Wayne Beaty "Standard Handbook for Electrical Engineers," 13th Edition, McGraw-Hill, Inc., 1993.
3. Decision Criteria. Page 13-3
