1. What Is Internal Rate Of Return?

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 equation:

Where:

• \( NPV \) — Net Present Value
• \( CF_t \) — 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, representing the break-even discount rate for the investment.

3. Importance Of IRR Calculation

Details: IRR is crucial for capital budgeting decisions, helping investors compare different investment opportunities and determine which projects are financially viable.

4. Using The Calculator

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

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. The higher the IRR, the more desirable the investment.

Q2: How does IRR differ from ROI?
A: ROI shows total return percentage, while IRR accounts for the time value of money and provides the annualized rate of return.

Q3: What are the limitations of IRR?
A: IRR may give misleading results for non-conventional cash flows and doesn't account for project scale or reinvestment rate assumptions.

Q4: Can IRR be negative?
A: Yes, a negative IRR indicates that the project is expected to lose money over its lifetime.

Q5: When should I use IRR vs NPV?
A: Use IRR for comparing projects of similar scale, and NPV for absolute value assessment. They often complement each other in investment analysis.