IRR vs WACC
IRR (Internal Rate of Return) and WACC (Weighted Average Cost of Capital) both come up in business conversations and get confused. Here's the plain-English difference, side by side, so you can use each one with confidence.
The key difference: IRR refers to internal rate of return, while WACC refers to weighted average cost of capital — they describe different things even when they show up in the same sentence.
IRR — Internal Rate of Return
The annualized return rate that makes an investment's NPV equal to zero. Used to compare investments on a like-for-like basis.
WACC — Weighted Average Cost of Capital
The blended cost of a company's debt and equity, weighted by how much of each it uses. WACC is the discount rate most companies use to evaluate investments.
When to use IRR
Reach for "IRR" when the conversation is specifically about internal rate of return. The annualized return rate that makes an investment's NPV equal to zero. Used to compare investments on a like-for-like basis.
When to use WACC
Reach for "WACC" when the conversation is specifically about weighted average cost of capital. The blended cost of a company's debt and equity, weighted by how much of each it uses. WACC is the discount rate most companies use to evaluate investments.
FAQs
What is the difference between IRR and WACC?
IRR stands for Internal Rate of Return — The annualized return rate that makes an investment's NPV equal to zero. Used to compare investments on a like-for-like basis. WACC stands for Weighted Average Cost of Capital — The blended cost of a company's debt and equity, weighted by how much of each it uses. WACC is the discount rate most companies use to evaluate investments.
Are IRR and WACC the same thing?
No. They're often used in the same conversation because they're related, but they describe different concepts. IRR = Internal Rate of Return. WACC = Weighted Average Cost of Capital.
When should I use IRR vs WACC?
Use IRR when you're specifically referring to internal rate of return. Use WACC when the topic is weighted average cost of capital.