Internal Rate of Return (IRR) Calculator

Choose the method and enter your values:

1. Fixed Cash Flow

2. Irregular Cash Flow

Initial Investment:

Year 1: Year 2: Year 3: Year 4: Year 5:

Year 6: Year 7: Year 8: Year 9: Year 10:

Year 11: Year 12: Year 13: Year 14: Year 15:

Year 16: Year 17: Year 18: Year 19: Year 20:

About Internal Rate of Return (IRR)

In investments and finance, decision-makers and analysts often face the challenge of comparing multiple project proposals or investment opportunities. Each project typically comes with a forecasted series of future cash flows, an upfront cost, and some level of risk. IRR (Internal Rate of Return) is one of the key metrics used to evaluate such opportunities.

What is IRR?

IRR is the discount rate at which the net present value (NPV) of all cash flows equals zero. If the IRR is greater than the required return or cost of capital, the investment is considered profitable. Otherwise, it may not be financially viable.

How is IRR calculated?

IRR is essentially found by solving the NPV equation for the discount rate where NPV = 0. Since this cannot usually be solved directly, financial calculators, spreadsheets, or numerical methods are used.

Uses of IRR

Helps in investment decision making
Used in capital budgeting to compare projects
Analysis of loans and lease agreements
Evaluation in private equity and venture capital
Real estate investment analysis

Example

Suppose a machine costs $40,000 and generates cash inflows of $10,000, $20,000, and $30,000 over three years. The IRR works out to about 19.4%. If the cost of capital is 12%, this project is attractive. If it is 20%, the project is not viable.

Limitations of IRR

Does not account for project size
Does not explicitly measure risk
Assumes reinvestment at IRR rate
May give multiple IRR values in some cases

Therefore, IRR should be considered alongside other metrics such as NPV, MIRR, and Payback Period for well-informed investment decisions.