1. What Is Incremental Internal Rate Of Return?

The Incremental Internal Rate of Return (IIRR) is the internal rate of return calculated on the differential cash flows between two investment alternatives. It represents the IRR of the incremental investment and helps in choosing between mutually exclusive projects.

2. How Does The Calculator Work?

The calculator uses the IRR calculation on incremental cash flows:

Where:

• \( IIRR \) — Incremental Internal Rate of Return (%)
• \( IRR \) — Internal Rate of Return function
• \( \text{Incremental Cash Flows} \) — Difference in cash flows between two projects

Explanation: The IIRR is found by solving for the discount rate that makes the net present value of incremental cash flows equal to zero.

3. Importance Of IIRR Calculation

Details: IIRR is crucial for capital budgeting decisions when comparing mutually exclusive projects with different scales and cash flow patterns. It helps determine which project provides better returns on the additional investment.

4. Using The Calculator

Tips: Enter incremental cash flows as comma-separated values. The first value should be the initial investment (negative), followed by the net cash inflows (positive). Example: -1000,300,400,500 represents $1000 initial investment with returns of $300, $400, and $500 over three periods.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between IRR and IIRR?
A: IRR calculates the return of a single project, while IIRR calculates the return on the additional investment when comparing two mutually exclusive projects.

Q2: When should I use IIRR instead of IRR?
A: Use IIRR when comparing mutually exclusive projects with different investment sizes or when the projects have conflicting IRR rankings.

Q3: How do I interpret IIRR results?
A: If IIRR exceeds the required rate of return, the project with higher investment is preferable. If IIRR is less than the required return, choose the project with lower investment.

Q4: What are the limitations of IIRR?
A: IIRR may give multiple solutions for non-conventional cash flows and may not work well when incremental cash flows change signs multiple times.

Q5: Can IIRR be negative?
A: Yes, IIRR can be negative if the incremental investment results in a net decrease in value, indicating the additional investment is not worthwhile.