1. What is Internal Rate of Return (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 a project or investment.

2. How Does the Calculator Work?

The calculator uses the IRR formula:

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 iteratively by solving for the discount rate that sets the NPV of cash flows to zero.

3. Importance of IRR Calculation

Details: IRR is a crucial metric in capital budgeting and investment analysis. It helps compare the profitability of different investments and determines whether a project meets the required rate of return.

4. Using the Calculator

Tips: Enter cash flows as comma-separated values. The first cash flow is typically the initial investment (negative value), followed by expected returns (positive values).

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR value?
A: A good IRR depends on the cost of capital and industry standards. Generally, an IRR higher than the cost of capital indicates a profitable investment.

Q2: Can IRR be negative?
A: Yes, IRR can be negative if the total cash outflows exceed the inflows, indicating a loss-making investment.

Q3: What are the limitations of IRR?
A: IRR assumes reinvestment at the same rate, may have multiple solutions for unconventional cash flows, and doesn't account for project scale.

Q4: How does IRR differ from ROI?
A: ROI measures total return percentage, while IRR calculates the annualized effective compounded return rate.

Q5: When should I use IRR vs NPV?
A: IRR is useful for comparing projects of different sizes, while NPV provides the absolute dollar value of an investment's profitability.