Internal Rate of Return on Investment Calculator

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Internal Rate of Return (IRR) Calculator

Enter the total upfront cost of the project or investment.

Annual Cash Flows (Returns)

Resulting Internal Rate of Return

0%

function calculateIRR() { var initial = parseFloat(document.getElementById('initialInvestment').value); var y1 = parseFloat(document.getElementById('y1').value) || 0; var y2 = parseFloat(document.getElementById('y2').value) || 0; var y3 = parseFloat(document.getElementById('y3').value) || 0; var y4 = parseFloat(document.getElementById('y4').value) || 0; var y5 = parseFloat(document.getElementById('y5').value) || 0; if (isNaN(initial) || initial <= 0) { alert("Please enter a valid initial investment amount."); return; } var cashFlows = [-initial, y1, y2, y3, y4, y5]; // Newton-Raphson method for IRR calculation var irr = 0.1; // Initial guess var maxIterations = 1000; var precision = 0.000001; for (var i = 0; i < maxIterations; i++) { var npv = 0; var derivativeNPV = 0; for (var t = 0; t 0) { derivativeNPV -= t * cashFlows[t] / Math.pow(1 + irr, t + 1); } } var nextIrr = irr – (npv / derivativeNPV); if (Math.abs(nextIrr – irr) 15) { statusDiv.innerHTML = "This represents a strong return on capital for most industries."; } else if (irrPercent > 7) { statusDiv.innerHTML = "This is a moderate return, typical for stable long-term investments."; } else if (irrPercent > 0) { statusDiv.innerHTML = "Positive return, but may be lower than alternative market benchmarks."; } else { statusDiv.innerHTML = "Negative IRR indicates the project does not recoup the initial investment."; } }

What is Internal Rate of Return (IRR)?

The Internal Rate of Return (IRR) is a critical financial metric used in capital budgeting to estimate the profitability of potential investments. It represents the annual rate of growth an investment is expected to generate. Technically, IRR is the discount rate that makes the net present value (NPV) of all cash flows (both positive and negative) from a particular project equal to zero.

How the IRR Calculation Works

Unlike a simple ROI calculation, the IRR accounts for the time value of money. It recognizes that receiving money today is worth more than receiving the same amount in the future. The formula solves for 'r' in the following equation:

0 = CF0 + [CF1 / (1+r)1] + [CF2 / (1+r)2] + … + [CFn / (1+r)n]
  • CF0: The initial investment (a negative value).
  • CF1..n: The cash flows received in subsequent periods.
  • r: The Internal Rate of Return we are solving for.

Practical Example

Imagine you invest 50,000 into a new business venture. Over the next five years, the business generates the following returns:

Period Cash Flow
Year 0 (Investment) -50,000
Year 1 12,000
Year 2 15,000
Year 3 18,000
Year 4 20,000
Year 5 25,000

Using the calculator above, these figures would yield an IRR of approximately 23.44%. This percentage tells the investor that the project's internal efficiency is equivalent to an annual compounded growth rate of over 23%.

Why is IRR Important?

Investment professionals use IRR to compare different projects. Generally, the higher a project's IRR, the more desirable it is to undertake. Companies often have a "hurdle rate"—a minimum IRR that a project must exceed before it is approved. It is particularly useful for:

  • Comparing capital intensive projects with different lifespans.
  • Evaluating the efficiency of private equity and venture capital investments.
  • Assessing real estate development profitability.

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