Calculate IRR
This calculator helps you compute the Internal Rate of Return (IRR) for a series of cash flows, assisting finance professionals in capital budgeting decisions.
Results
Data Source and Methodology
All calculations are rigorously based on the standard financial formulas and data provided by authoritative finance sources.
The Formula Explained
The IRR is calculated using the formula that sets the Net Present Value (NPV) to zero: \( \text{NPV} = \sum \frac{C_t}{(1 + \text{IRR})^t} = 0 \), where \( C_t \) is the cash flow at time t.
Glossary of Terms
- Cash Flow: The net amount of cash being transferred in and out of a business.
- IRR: The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
Example: A Step-by-Step Guide
For a project with initial investment of $1000 and subsequent cash flows of $200, $300, and $400, the IRR is the rate that makes the NPV zero.
Frequently Asked Questions (FAQ)
What is IRR?
IRR is the rate at which the net present value of future cash flows of an investment is zero, indicating the profitability of potential investments.
How does IRR differ from NPV?
While IRR is the rate at which NPV becomes zero, NPV indicates the value of future cash flows in today's dollars.