Internal rate of return

IRR, the discount rate at which a project’s net present value is zero, used in ship finance to test whether a vessel acquisition or newbuilding clears the investor’s required return. The cash flows are the purchase price, the projected charter or spot earnings net of OPEX, and the residual or scrap value at sale. Because shipping earnings are cyclical, the IRR of a vessel investment is highly sensitive to the rate assumptions and the assumed exit value.