Internal Rate of Return Calculator

Internal Rate of Return

The internal rate of return calculator facilitates the tricky calculation of IRR, as the concept of IRR is widely used for evaluating investments. IRR is a technique of discounting cash flows for analyzing investment decisions. It is the discount rate at which the net present value of the project is’ 0 ‘, which means that the discounted future cash inflows of the project are equal to the total cash outflows of that project.

Formula for Calculating Internal Rate of Return

In order to calculate IRR, consider the following formula:

where, a = lower rate of return

b = higher rate of return

NPVa =NPV at lower rate

& NPVb = NPV at higher rate.

About the Calculator / Features

IRR Calculator quickly delivers the result of the calculation by simply inserting the following details into it.

  • Lower rate of return
  • Higher rate of return
  • The net present value at lower rate
  • The net present value at higher rate

Calculator

How to Calculate using Calculator

The user must provide the calculator with the following data to obtain immediate results.

Lower rate of return

Lower the rate of return, higher the net present value.

Higher rate of return

Similarly, higher the rate of return, lower the net present value.

NPV at lower rate

It is the net present value calculated at the lower interest rate.

NPV at higher rate

It is the net present value that is calculated with a higher rate of return.

Example of Internal Rate of Return

Let us understand this concept using an example: Suppose you invested $10,000 for 3 years in Project X, and the money generated at the end of each year is $5,000. The discounting rates are 18% & 25%.

Cash InflowsAmountPV @ 18%PV @ 25%
At the end of 1st year$5,000$4,237$4,000
At the end of 2nd year$5,000$3,591$3,200
At the end of 3rd year$5,000$3,043$2,560
Total$15,000$10,871$9,760

NPV @ 18% = 871 (i.e. 10,871 – 10,000)

& NPV @ 25% = -240 (i.e. 9,760 – 10,000)

Therefore IRR = 18% + [871/(871-(-240))](25% – 18%) = 23.49%

Interpretation of Internal Rate of Return

IRR gives us the rate at which the outflows of funds of a project are equal to the inflows of funds. It defines whether the project is advantageous or not. It implies that the IRR of the project is greater than the required rate of return. A higher IRR is usually preferred by companies, but a company can choose a lower IRR if it covers its cost of capital (k).

Cautions

IRR is a very widely used concept, but sometimes its scope becomes limited. For example, when the discounting rate is not known, one is unable to find IRR. In such a scenario, the Net Present Value method comes into play. If the NPV of the project is greater than zero, the project stands feasible.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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