IRR Calculator
Internal Rate of Return analysis with comprehensive investment evaluation and financial metrics
Newton-Raphson algorithm for precise IRR calculation
Net Present Value with discount rate analysis
Comprehensive investment quality assessment
Sensitivity analysis and risk assessment
Investment Cash Flows
Used for NPV calculations
Cash Flow Schedule
Understanding Internal Rate of Return
IRR Fundamentals
What is IRR?
The Internal Rate of Return is the discount rate that makes the Net Present Value of all cash flows equal to zero. It represents the expected annualized return of an investment, making it one of the most important metrics for investment evaluation and capital budgeting decisions.
Decision Rule
Accept investments where IRR exceeds your required rate of return (or cost of capital). When comparing multiple projects, generally choose the one with the highest IRR, assuming other factors are equal.
Calculation Method
IRR is calculated using iterative methods like Newton-Raphson since it cannot be solved algebraically. The calculator finds the rate where NPV equals zero through successive approximations.
Practical Applications
Capital Budgeting
Use IRR to evaluate long-term investments, compare projects of different sizes, and make decisions about capital allocation. Essential for strategic planning.
Investment Comparison
IRR allows comparison of investments with different timelines and cash flow patterns. Higher IRR generally indicates better investment opportunities.
Performance Measurement
Track actual investment performance against projected IRR to evaluate investment decision quality and improve future forecasting accuracy.
IRR Analysis Best Practices
Realistic Cash Flows
Use conservative estimates for cash inflows and include all relevant costs.
Consider Time Horizon
Match the analysis period to the expected life of the investment.
Multiple Metrics
Use IRR alongside NPV, payback period, and ROI for comprehensive analysis.
Sensitivity Testing
Test how changes in assumptions affect the IRR to understand investment risk.
Reinvestment Assumption
Remember IRR assumes reinvestment at the same rate, which may not be realistic.
Multiple IRRs
Be aware that non-conventional cash flows can result in multiple IRRs.