1. What Is IRR?

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. It is used to evaluate the attractiveness of investments or projects.

2. How Does The Calculator Work?

The calculator uses the IRR equation:

Where:

• \( CF_t \) — Cash flow at time period t
• \( IRR \) — Internal rate of return
• \( t \) — Time period
• \( n \) — Total number of periods

Explanation: The IRR is found by solving the equation where the sum of discounted cash flows equals zero, using numerical methods like Newton-Raphson.

3. Importance Of IRR Calculation

Details: IRR is crucial for investment analysis, capital budgeting, and comparing different investment opportunities. A higher IRR generally indicates a more desirable investment.

4. Using The Calculator

Tips: Enter cash flows as comma-separated values. The first cash flow is typically negative (initial investment), followed by positive cash flows (returns). Example: -1000,300,400,500 represents $1000 investment with returns of $300, $400, and $500.

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR value?
A: Generally, an IRR higher than the cost of capital or hurdle rate is considered good. Typically, IRRs above 10-15% are attractive for most investments.

Q2: What are the limitations of IRR?
A: IRR assumes reinvestment at the same rate, may give multiple solutions for unconventional cash flows, and doesn't account for project scale.

Q3: How is IRR different from ROI?
A: ROI shows total return percentage, while IRR considers the time value of money and provides the annualized rate of return.

Q4: Can IRR be negative?
A: Yes, negative IRR indicates the project is losing money and the investment should typically be rejected.

Q5: When should I use IRR vs NPV?
A: Use IRR for comparing projects of similar scale and duration. Use NPV for absolute value assessment and when cash flow patterns are unconventional.