Calculating Internal Rate Of Return

Internal Rate of Return provides the interest rate return of a project's lifetime of
cash flows.

It is important that you understand the time value of money theory behind calculating internal rate of return (IRR). The essence is that a given amount of money now is worth more now than that same amount of money sometime in the future. So if you find the net present value (NPV) of a series of cashflows over time, when the NPV goes to zero the interest rate or discount rtate that was used will be the IRR when the NPV is zero.

Here are a couple of reference to deepen your understanding of the concept: How to Calculate IRR and Formula of IRR. It is also helpful to view the references on the NPV Calculator page. When calculating internal rate of return you can use the provided calculator on your series of cash flows. Here are a couple of case studies to get you going: NPV and IRR Calculation and IRR-NPV Case Study.

The Calculator

You will see two series of cash flows. Each series of cash flows support the IRR result at the bottom. To obtain an internal rate of return for your cash flows, you need to supply the actual cash flows from your project. Be sure to clear out the numbers to zero from the rate of return calculator for the years not needed. The year column can be changed by just changing the first year.

NPV and IRR

NPV (Net Present Value) calculations require you to provide an interest rate. IRR (Internal Rate Of Return) calculators tell you what the interest rate is, based on the actual cash flows. Many people find that the IRR is more intuitive. Knowing what it is for your project cash flows is kind of like knowing the interest rate on your savings account. Use the above IRR software to find your projects rate of return.

Internal Rate of Return IRR

Listed below are a few possible applications that you might use this economic analysis software for:

  • Discounted Cash Flow Analysis - Find the interest rate return that you would receive as your investment return rate.
  • Capital Budget Planning - Go through the capital budget process so that you make the best economic decision.
  • Discounted Cash Flow Analysis - When you calculate IRR you will have one number for an objective comparison between capital projects.
  • Investment Calculator - Determine if a potential investment is a good choice or not.
  • Compound Rate Of Return - Understand the compounding effect of interest on on your investments.

Summary

Once you have finished calculating internal rate of return for each of your projects, you can make a rational decision about which project is most economical for your situation.
Warning! The IRR found may not be valid if the cash flows swing back and forth from positive to negative values. It is possible to have more than one answer in that case.

Note: This internal rate of return calculator is often simply referred to as an irr calculator.

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