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 profitability of potential investments.

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 calculator uses an iterative numerical method (Newton-Raphson) to solve for the discount rate that sets the NPV to zero.

3. Importance of IRR Calculation

Details: IRR is crucial for investment analysis, capital budgeting, and comparing the profitability of different projects. It helps investors determine whether an investment meets their required rate of return.

4. Using the Calculator

Tips: Enter cash flows as comma-separated values. The first value should be the initial investment (typically negative), followed by subsequent cash flows. Example: -1000,300,400,500

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR value?
A: Generally, an IRR higher than the cost of capital or required rate of return is considered good. Typically, values above 10-15% are desirable.

Q2: Can IRR be negative?
A: Yes, if the project's cash outflows exceed the present value of cash inflows, IRR can be negative, indicating a loss-making investment.

Q3: What are the limitations of IRR?
A: IRR may give multiple solutions for non-conventional cash flows and doesn't account for project scale. It should be used alongside other metrics like NPV.

Q4: How does IRR differ from ROI?
A: ROI measures total return as a percentage of initial investment, while IRR calculates the annualized rate of return that makes NPV zero.

Q5: When is IRR not applicable?
A: IRR may not be reliable for projects with alternating positive and negative cash flows, or when comparing projects of different durations.