The Internal Rate of Return (IRR) is a crucial metric used in capital budgeting to estimate the profitability of potential investments. It represents the discount rate at which the net present value (NPV) of all cash flows (both positive and negative) from a particular project or investment equals zero. In simpler terms, it's the effective rate of return that an investment is expected to yield. A higher IRR generally indicates a more desirable investment, assuming all other factors are equal. When comparing investment opportunities, the IRR can be a valuable tool, especially when the initial investment and expected cash flows are known.
The calculated Internal Rate of Return (IRR) is: –
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function calculateIRR() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var cashFlowsInput = document.getElementById("cashFlows").value;
if (isNaN(initialInvestment) || initialInvestment <= 0) {
document.getElementById("irrResult").textContent = "Please enter a valid positive initial investment.";
return;
}
if (cashFlowsInput.trim() === "") {
document.getElementById("irrResult").textContent = "Please enter cash flows.";
return;
}
var cashFlows = cashFlowsInput.split(',')
.map(function(cf) { return parseFloat(cf.trim()); })
.filter(function(cf) { return !isNaN(cf); });
if (cashFlows.length === 0) {
document.getElementById("irrResult").textContent = "Please enter valid numeric cash flows.";
return;
}
// Function to calculate Net Present Value (NPV)
function calculateNPV(rate, cashFlows, initialInvestment) {
var npv = -initialInvestment; // Start with the initial outflow
for (var i = 0; i < cashFlows.length; i++) {
npv += cashFlows[i] / Math.pow(1 + rate, i + 1);
}
return npv;
}
// IRR calculation using the Newton-Raphson method (or a simpler iterative approach)
// For simplicity and broader compatibility, we'll use an iterative search.
// A common approach is to iterate through a range of rates.
// More robust methods exist, but this is a good starting point.
var irr = -1; // Default to -1 or some indicator of failure/no solution in range
var minRate = -0.99; // Minimum rate to check (avoiding -100% which is division by zero)
var maxRate = 2.00; // Maximum rate to check (200%)
var step = 0.0001; // Step for iteration
var tolerance = 0.0001; // How close NPV needs to be to zero
var currentRate = minRate;
var bestRate = -1;
var minNPVdiff = Infinity;
// Simple iterative search for IRR
// This is an approximation and might not be precise for all cases.
// Real-world financial libraries often use more sophisticated algorithms.
var numIterations = 10000; // Limit iterations to prevent infinite loops
var n = 0;
while (n < numIterations) {
var npv = calculateNPV(currentRate, cashFlows, initialInvestment);
// If NPV is very close to zero, we've found our IRR
if (Math.abs(npv) < tolerance) {
bestRate = currentRate;
break;
}
// Keep track of the rate that yielded the NPV closest to zero
var npvDiff = Math.abs(npv);
if (npvDiff maxRate) {
break;
}
}
if (bestRate !== -1 && Math.abs(calculateNPV(bestRate, cashFlows, initialInvestment)) < tolerance * 10) { // Check if found rate is good enough
irr = bestRate * 100; // Convert to percentage
document.getElementById("irrResult").textContent = irr.toFixed(2) + "%";
} else {
document.getElementById("irrResult").textContent = "Could not find a definitive IRR within the tested range or cash flows don't yield positive IRR.";
}
}