The Internal Rate of Return (IRR) is a 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 (both positive and negative) from a particular project equal to zero.
Essentially, IRR is the expected compound annual rate of return that will be earned on a project or investment. Generally, the higher a project's IRR, the more desirable it is to undertake.
How to Use This Calculator
To calculate the IRR for your project, follow these steps:
Initial Investment: Enter the initial cost of the project as a negative number. For example, if you are spending $50,000, enter -50000.
Annual Cash Flows: Enter the expected income or savings generated by the project for each year. These should typically be positive numbers.
Interpret Results: If the IRR is greater than your cost of capital (the rate it costs you to borrow money), the project is generally considered a good investment.
Example Calculation
Suppose you invest $10,000 today (Initial Investment: -10000). Over the next 5 years, the investment returns $2,500 annually. Using the calculator, your IRR would be approximately 7.93%.
Why IRR Matters
Business owners and analysts use IRR to compare different projects. If "Project A" has an IRR of 15% and "Project B" has an IRR of 10%, Project A is typically preferred, assuming all other factors like risk and duration are equal. It provides a single percentage that summarizes the financial merit of an investment over time.
function calculateIRRLogic() {
var c0 = parseFloat(document.getElementById('initial_outlay').value);
var c1 = parseFloat(document.getElementById('flow_1').value) || 0;
var c2 = parseFloat(document.getElementById('flow_2').value) || 0;
var c3 = parseFloat(document.getElementById('flow_3').value) || 0;
var c4 = parseFloat(document.getElementById('flow_4').value) || 0;
var c5 = parseFloat(document.getElementById('flow_5').value) || 0;
var resultArea = document.getElementById('irr-result-area');
var output = document.getElementById('irr-output');
var message = document.getElementById('irr-message');
if (isNaN(c0) || c0 >= 0) {
alert("Please enter a valid negative number for the Initial Investment.");
return;
}
var cashFlows = [c0, c1, c2, c3, c4, c5];
// Newton-Raphson Method to find IRR
var guess = 0.1; // 10% initial guess
var maxIterations = 1000;
var precision = 0.0000001;
var irr = guess;
for (var i = 0; i < maxIterations; i++) {
var npv = 0;
var dNpv = 0;
for (var t = 0; t 0) {
dNpv -= t * cashFlows[t] / Math.pow(1 + irr, t + 1);
}
}
var newIrr = irr – (npv / dNpv);
if (Math.abs(newIrr – irr) 0) {
message.innerHTML = "This project shows a positive internal rate of return.";
} else {
message.innerHTML = "The internal rate of return is negative, indicating a net loss over the period.";
}
}
}