Internal Rate of Return Irr Calculator

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Internal Rate of Return (IRR) Calculator

Evaluate the profitability of your investments and projects

What is the Internal Rate of Return (IRR)?

The Internal Rate of Return (IRR) is a vital financial metric used in capital budgeting to estimate the profitability of potential investments. It is the discount rate that makes the Net Present Value (NPV) of all cash flows from a project equal to zero.

Why IRR Matters for Investors

IRR allows investors to compare the annual growth rates of different projects or investments regardless of their scale. Generally, the higher a project's IRR, the more desirable it is to undertake. It is commonly used alongside Net Present Value (NPV) to determine whether a project is worth the capital risk.

The Math Behind IRR

The calculation uses the following formula, where r is the IRR:

0 = CF0 + CF1/(1+r)1 + CF2/(1+r)2 + … + CFn/(1+r)n

Because the variable r cannot be isolated analytically in complex equations, the calculation requires numerical iteration (like the Newton-Raphson method) to find the precise percentage.

Practical IRR Example

Imagine you invest $10,000 today into a small business project. Over the next four years, the project returns the following cash flows:

  • Year 1: $3,000
  • Year 2: $4,000
  • Year 3: $4,000
  • Year 4: $5,000

By entering these values into the calculator, you would find an IRR of approximately 19.23%. If your cost of capital is 10%, this project would be considered a highly profitable venture because the IRR exceeds the required rate of return.

function calculateIRR() { var cashFlows = []; // Initial outlay must be negative for the formula var initial = parseFloat(document.getElementById('initialInvestment').value); if (isNaN(initial) || initial === 0) { alert("Please enter a valid initial investment (outlay)."); return; } cashFlows.push(-Math.abs(initial)); // Get year cash flows for (var i = 1; i <= 6; i++) { var val = parseFloat(document.getElementById('cf' + i).value); if (!isNaN(val)) { cashFlows.push(val); } } if (cashFlows.length < 2) { alert("Please enter at least one positive cash flow."); return; } // Newton-Raphson Method var guestRate = 0.1; // 10% initial guess var maxIterations = 1000; var precision = 0.0000001; var resultRate = guestRate; for (var j = 0; j < maxIterations; j++) { var npv = 0; var derivativeNpv = 0; for (var t = 0; t 0) { derivativeNpv -= t * cashFlows[t] / Math.pow(1 + resultRate, t + 1); } } var newRate = resultRate – (npv / derivativeNpv); if (Math.abs(newRate – resultRate) < precision) { resultRate = newRate; break; } resultRate = newRate; } var resultContainer = document.getElementById('irrResult'); var valueDiv = document.getElementById('resultValue'); var msgDiv = document.getElementById('resultMessage'); if (isNaN(resultRate) || !isFinite(resultRate)) { resultContainer.style.display = "block"; resultContainer.style.backgroundColor = "#fdeaea"; valueDiv.innerText = "Error"; valueDiv.style.color = "#c0392b"; msgDiv.innerText = "Could not calculate IRR. Please check if your cash flows are realistic."; } else { resultContainer.style.display = "block"; resultContainer.style.backgroundColor = "#eafaf1"; valueDiv.innerText = (resultRate * 100).toFixed(2) + "%"; valueDiv.style.color = "#27ae60"; msgDiv.innerText = "Annualized Internal Rate of Return"; } }

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