IRR Calculator: Master Internal Rate of Return Calculations & Analysis
A comprehensive guide to IRR calculations for investment decisions. Learn the IRR formula, compare it with NPV, interpret the results, and optimize capital budgeting using real-world examples.
What is IRR and Why is it Important?
Internal Rate of Return (IRR) is a key financial metric used to estimate the profitability of potential investments. It is important because:
- It provides a single figure for comparing various investment opportunities.
- It accounts for the time value of money.
- It aids in capital budgeting and investment decision-making.
How to Use This Calculator
- Enter the initial investment amount.
- Input the expected cash flows for each year.
- The calculator will automatically compute the IRR.
- Click 'Reset' to revert to default values.
Frequently Asked Questions
What does IRR tell us?
IRR indicates the expected annual rate of return on an investment. It is the discount rate that makes the net present value (NPV) of all cash flows equal to zero.
How is IRR used in decision-making?
Typically, a higher IRR suggests a more attractive investment. Companies compare a project's IRR to their required rate of return or cost of capital to decide whether to proceed.
What are the limitations of IRR?
IRR does not account for the size of the investment, may be misleading when comparing mutually exclusive projects, and can produce multiple or no solutions for non-conventional cash flows.