1. What is Internal Rate of Return (IRR)?

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. It's commonly used to evaluate the profitability of potential investments.

2. How Does the Calculator Work?

The calculator solves the IRR equation:

Where:

• \( CF_t \) — Cash flow at time period t
• \( r \) — Internal rate of return
• \( t \) — Time period

Explanation: The equation finds the rate where the sum of discounted cash flows equals zero, using numerical methods (Newton-Raphson in this implementation).

3. Importance of IRR Calculation

Details: IRR is widely used in capital budgeting to compare the profitability of investments. A project is generally considered good if its IRR exceeds the cost of capital.

4. Using the Calculator

Tips: Enter cash flows as comma-separated values. The first cash flow should typically be negative (initial investment). Example: -1000,300,300,300,300 represents a $1000 investment with four $300 returns.

5. Frequently Asked Questions (FAQ)

Q1: What's a good IRR value?
A: Generally, an IRR higher than the company's cost of capital is good. The higher the IRR, the more desirable the project.

Q2: What are limitations of IRR?
A: IRR doesn't account for project size, assumes reinvestment at the IRR rate, and can give multiple values for non-conventional cash flows.

Q3: How does IRR compare to 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, a negative IRR indicates the project loses money at the calculated rate.

Q5: When is IRR not suitable?
A: For projects with alternating positive/negative cash flows, or when comparing projects of different durations.