Which factors primarily drive Internal Rate of Return (IRR)?

The Internal Rate of Return (IRR) is a critical financial metric used to evaluate the profitability of an investment or project. It represents the rate at which the net present value (NPV) of all cash flows from the investment equals zero. The factors that primarily drive IRR include the price of acquisition and the cash generated during the investment term.

The price of acquisition is significant because it establishes the initial cash outflow for the investment. A lower purchase price can enhance the potential IRR, as it reduces the amount of capital that needs to be recovered through future cash flows. On the other hand, the cash generated during the investment term—both operating cash flows and potential resale value—directly impacts the total cash inflows that will be compared against the initial investment. Higher cash inflows, resulting from increased revenues or efficient operations, lead to a higher IRR.

The other options do not encapsulate the primary drivers of IRR effectively. While operational efficiency can affect cash flow, it is not a direct factor in calculating IRR. Likewise, corporate governance and regulatory compliance may influence broader operational success but do not determine the financial returns evaluated through IRR. The focus on cash flows and acquisition price makes them the most critical components in determining IR