1. What is IRR?

The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of potential investments. It is the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

2. How Does the Calculator Work?

The calculator uses the IRR formula:

Where:

• \( CF_t \) — Cash flow at time t
• \( IRR \) — Internal rate of return
• \( n \) — Number of periods

Explanation: The equation finds the discount rate where the sum of discounted cash flows equals the initial investment.

3. Importance of IRR Calculation

Details: IRR helps investors compare the profitability of different investments. A higher IRR generally indicates a more desirable investment.

4. Using the Calculator

Tips: Enter initial investment as negative value (outflow) and subsequent cash flows as positive values (inflows), separated by commas.

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR value?
A: Generally, an IRR above the cost of capital is desirable. The higher the IRR, the better the investment.

Q2: What are limitations of IRR?
A: IRR doesn't account for project size, reinvestment rates, or multiple IRR possibilities with alternating cash flows.

Q3: How is IRR different from ROI?
A: ROI shows total return percentage, while IRR shows annualized return rate considering time value of money.

Q4: Can IRR be negative?
A: Yes, negative IRR means the investment would lose money.

Q5: What if my cash flows change signs multiple times?
A: Multiple sign changes can result in multiple IRRs, making interpretation difficult.