What is an IRR Calculator?
An IRR Calculator computes the Internal Rate of Return (IRR), a financial metric used to evaluate the profitability of an investment or project. It helps investors and businesses determine the annualized expected return, where the net present value (NPV) of cash flows equals zero. The IRR is used for comparing projects, analyzing investments, and making informed financial decisions.
Formula of IRR
The IRR is calculated where the Net Present Value (NPV) of cash flows equals zero:
NPV = ∑ [ Cash Flow / (1 + IRR)^t ] = 0
Here, t is the time period, and IRR is the unknown variable to solve.
How to Use This IRR Calculator?
1. Enter your initial investment as a negative value (e.g., -1000).
2. Input future cash flows in separate fields.
3. Click the "Calculate IRR" button to compute the IRR.
4. View the step-by-step solution and graph of cash flows.
Use the clear button to reset inputs for a new calculation.
IRR Calculator
FAQs
What is IRR?
The Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of all cash flows equals zero.
Why is IRR important?
IRR helps in evaluating the profitability of projects, comparing investment opportunities, and making strategic financial decisions.
What is the formula for IRR?
The IRR formula is derived where NPV = 0, calculated iteratively using cash flows and discount rates.
Can IRR be negative?
Yes, a negative IRR indicates the project or investment is expected to lose value over time.
What are cash flows?
Cash flows represent the inflows (positive) or outflows (negative) of money over different periods.
Is IRR the same as ROI?
No, ROI is a basic measure of return, while IRR accounts for the time value of money and cash flow timing.
How is IRR different from NPV?
NPV calculates the net value of cash flows at a specific discount rate, while IRR finds the rate where NPV is zero.
What is a good IRR value?
A good IRR is subjective but generally higher than the cost of capital or alternative investment returns.
What happens if IRR cannot be calculated?
If cash flows are irregular or non-conventional, IRR may not exist or result in multiple values.
Can IRR be used for all projects?
IRR is suitable for projects with conventional cash flows, but alternatives like NPV are better for complex scenarios.