| Year | Cash Flow | Present Value @ "+finalRate+"% |
|---|---|---|
| "+j+" | $"+cashflows[j].toLocaleString()+" | $"+pv.toLocaleString(undefined,{minimumFractionDigits:2,maximumFractionDigits:2})+" |
| Net Present Value (NPV) | $0.00 | |
Calculator Use
The IRR calculator is a powerful financial tool used to estimate the profitability of potential investments. Internal Rate of Return (IRR) is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. This irr calculator allows you to input an initial investment and up to five subsequent cash flows to find the annualized rate of return you can expect.
By using this tool, investors and business managers can compare the projected return of various projects. If the IRR of a project exceeds the company's required rate of return or cost of capital, the project is generally considered a good investment.
- Initial Investment
- The amount of money spent at the beginning of the project (Year 0). This is treated as a negative cash flow (outflow).
- Yearly Cash Flows
- The net amount of cash being received (inflow) or spent (outflow) during each specific time period.
- Calculation Frequency
- Choose between annual or monthly periods. Note that if you choose monthly, the result is the periodic rate.
How It Works
The IRR is calculated by solving the Net Present Value (NPV) equation for the discount rate. Because the variable for the rate appears in the denominator of each term and is raised to an increasing power, there is no analytical way to solve the formula directly. Instead, the irr calculator uses an iterative numerical method (like the Newton-Raphson method) to "guess" and refine the rate until the NPV is exactly zero.
The fundamental formula used in the background is:
0 = CF₀ + [CF₁ / (1+r)¹] + [CF₂ / (1+r)²] + … + [CFₙ / (1+r)ⁿ]
- CF₀: Initial Investment (Time 0)
- CF₁…CFₙ: Cash flows for periods 1 through n
- r: Internal Rate of Return (The value we are solving for)
- n: The total number of periods
Calculation Example
Example: An investor puts $10,000 into a small business venture. Over the next five years, the business generates returns of $2,000, $2,500, $3,000, $3,500, and $4,000 respectively.
Step-by-step logic:
- Initial Outlay (Year 0) = -$10,000
- Cash Flow Year 1 = $2,000
- Cash Flow Year 2 = $2,500
- Cash Flow Year 3 = $3,000
- Cash Flow Year 4 = $3,500
- Cash Flow Year 5 = $4,000
- The calculator tries different rates (r) to see which one makes the sum of these discounted values equal to zero.
- Result: Using the irr calculator, the Internal Rate of Return for this project is 14.33%.
Common Questions
What is a good IRR?
A "good" IRR depends entirely on the context and the cost of capital. In general, if the IRR is higher than the interest rate you would pay to borrow the money (the WACC), the investment is adding value. Most venture capital firms look for an IRR of 20-30%, while a stable real estate investment might be considered successful at 8-12%.
What is the difference between IRR and ROI?
ROI (Return on Investment) measures the total growth of an investment from start to finish but ignores the time value of money. IRR, however, accounts for *when* the cash flows occur. A project that pays $5,000 in Year 1 is much more valuable than a project that pays $5,000 in Year 10, even if the total ROI is the same. The irr calculator helps capture this timing importance.
Can IRR be negative?
Yes. If the total sum of undiscounted cash flows is less than the initial investment, the IRR will be negative. This indicates that the investment is expected to lose money over time. Businesses typically reject any project with an IRR lower than their "hurdle rate."