1. What is IRR?

The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of potential investments. It is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

2. How Does the Calculator Work?

The calculator uses the IRR formula:

Where:

• \( CF_t \) — Cash flow at time t
• \( IRR \) — Internal rate of return
• \( t \) — Time period
• \( n \) — Total number of periods

Explanation: The calculator uses an iterative Newton-Raphson method to solve for the rate that sets the NPV to zero.

3. Importance of IRR Calculation

Details: IRR is widely used in capital budgeting to evaluate the profitability of investments. A higher IRR indicates a more desirable investment.

4. Using the Calculator

Tips: Enter the initial investment as a positive number (it will be converted to negative). Enter subsequent cash flows separated by commas. Positive values represent inflows, negative values represent outflows.

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR value?
A: Generally, an IRR higher than the cost of capital is considered good. The exact threshold depends on the industry and risk profile.

Q2: What are the limitations of IRR?
A: IRR doesn't account for project size, may give multiple solutions for alternating cash flows, and assumes reinvestment at the IRR rate.

Q3: How does IRR compare to ROI?
A: ROI shows total return, while IRR shows annualized return considering the time value of money.

Q4: Can IRR be negative?
A: Yes, a negative IRR indicates the project loses money at the calculated rate.

Q5: When should I use IRR vs NPV?
A: NPV is generally preferred as it shows absolute value, but IRR is useful for comparing projects of different sizes.