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 equal to zero in a discounted cash flow analysis. It's used to evaluate the profitability of potential investments.

2. How Does the Calculator Work?

The calculator uses the IRR formula:

Where:

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

Explanation: The calculator solves for r using an iterative numerical method (Newton-Raphson) to find the rate that makes the NPV of all cash flows equal to zero.

3. Importance of IRR Calculation

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

4. Using the Calculator

Tips: Enter cash flows as comma-separated values (e.g., -1000,300,300,300,300). The first cash flow should typically be negative (initial investment). You can optionally provide an initial guess (default is 10%).

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR?
A: Generally, an IRR above the cost of capital is desirable. The higher the IRR, the better the investment opportunity.

Q2: What are limitations of IRR?
A: IRR doesn't account for project size, and may give misleading results with non-conventional cash flows (multiple sign changes).

Q3: What's the difference between IRR and 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 means the investment would lose money.

Q5: Why might my calculation fail?
A: Some cash flow patterns may not have an IRR solution, or may require a better initial guess.