The Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. It's the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In simpler terms, it's the expected annual rate of return that an investment will generate. Calculating IRR by hand is an iterative process, often requiring trial and error with different discount rates.
function calculateIRR() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var cashFlow1 = parseFloat(document.getElementById("cashFlow1").value);
var cashFlow2 = parseFloat(document.getElementById("cashFlow2").value);
var cashFlow3 = parseFloat(document.getElementById("cashFlow3").value);
var cashFlow4 = parseFloat(document.getElementById("cashFlow4").value);
var cashFlow5 = parseFloat(document.getElementById("cashFlow5").value);
if (isNaN(initialInvestment) || isNaN(cashFlow1) || isNaN(cashFlow2) || isNaN(cashFlow3) || isNaN(cashFlow4) || isNaN(cashFlow5)) {
document.getElementById("result").innerHTML = "Please enter valid numbers for all fields.";
return;
}
// Approximation method for IRR calculation (trial and error is needed for exact by hand)
// This is a simplified iterative approach. True "by hand" often involves financial tables or spreadsheets.
var cashFlows = [-initialInvestment, cashFlow1, cashFlow2, cashFlow3, cashFlow4, cashFlow5];
var irr = 0.0;
var npv = 0;
var increment = 0.01; // Step for iteration
var maxIterations = 1000;
var counter = 0;
// Function to calculate NPV for a given rate
function calculateNPV(rate, flows) {
var total = 0;
for (var i = 0; i < flows.length; i++) {
total += flows[i] / Math.pow(1 + rate, i);
}
return total;
}
// Find a rate where NPV is positive and another where it's negative
var rateLow = 0;
var rateHigh = 1; // Start with a broad range
var npvLow = calculateNPV(rateLow, cashFlows);
var npvHigh = calculateNPV(rateHigh, cashFlows);
// Initial check if the investment is profitable at a 0% rate
if (npvLow 0 && npvHigh < 0) {
irr = rateLow – npvLow * (rateHigh – rateLow) / (npvHigh – npvLow);
} else {
// If simple interpolation doesn't work, try iterative approach
var currentRate = 0.1; // Start guessing from 10%
while (counter < maxIterations) {
npv = calculateNPV(currentRate, cashFlows);
if (Math.abs(npv) 0) {
// If NPV is positive, we need a higher discount rate to lower NPV
currentRate += increment;
} else {
// If NPV is negative, we need a lower discount rate to increase NPV
currentRate -= increment;
}
counter++;
// Prevent rates from going negative or excessively high
if (currentRate 2) { // Cap at 200% to avoid infinite loops
document.getElementById("result").innerHTML = "IRR calculation may be unstable or extremely high. Iterations exceeded.";
return;
}
}
if (counter >= maxIterations) {
document.getElementById("result").innerHTML = "IRR calculation did not converge within maximum iterations. Try adjusting cash flows or initial investment.";
return;
}
}
document.getElementById("result").innerHTML = "Estimated Internal Rate of Return (IRR): " + (irr * 100).toFixed(2) + "%";
}
.calculator-container {
font-family: sans-serif;
border: 1px solid #ccc;
padding: 20px;
border-radius: 8px;
max-width: 500px;
margin: 20px auto;
background-color: #f9f9f9;
}
.calculator-container h2 {
text-align: center;
margin-bottom: 15px;
color: #333;
}
.calculator-container p {
font-size: 0.9em;
color: #555;
margin-bottom: 20px;
line-height: 1.5;
}
.input-section {
margin-bottom: 20px;
}
.input-section label {
display: block;
margin-bottom: 5px;
font-weight: bold;
color: #444;
}
.input-section input[type="number"] {
width: calc(100% – 22px);
padding: 10px;
margin-bottom: 10px;
border: 1px solid #ddd;
border-radius: 4px;
box-sizing: border-box;
}
.calculator-container button {
display: block;
width: 100%;
padding: 10px 15px;
background-color: #007bff;
color: white;
border: none;
border-radius: 4px;
font-size: 1em;
cursor: pointer;
transition: background-color 0.3s ease;
}
.calculator-container button:hover {
background-color: #0056b3;
}
#result {
margin-top: 20px;
padding: 15px;
background-color: #e9ecef;
border: 1px solid #ced4da;
border-radius: 4px;
text-align: center;
font-size: 1.1em;
font-weight: bold;
color: #333;
}