1. What is 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. It's used to evaluate the profitability of potential investments.

2. How Does the Calculator Work?

The calculator uses the IRR equation:

Where:

• \( C_0 \) — Initial investment (outflow, negative value)
• \( C_t \) — Cash flow at time t (positive for inflows)
• \( r \) — Internal rate of return (IRR)
• \( t \) — Time period

Explanation: The calculator solves for r using numerical methods (Newton-Raphson) since the equation cannot be solved algebraically.

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 the initial investment as a positive number (it will be converted to negative internally). Enter subsequent cash flows one per line, with positive values for inflows and negative for outflows.

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR value?
A: Generally, an IRR higher than the company's cost of capital indicates a good investment. 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 solutions for non-conventional cash flows.

Q3: How does IRR compare to ROI?
A: ROI shows total return, while IRR shows annualized return considering the time value of money.

Q4: Can IRR be negative?
A: Yes, a negative IRR indicates the investment loses money at that rate.

Q5: When is IRR not reliable?
A: For projects with alternating positive and negative cash flows (non-conventional), or when comparing projects of different durations.