Internal Rate of Return Calculator

Formula

The formula to calculate the internal rate of return (IRR) is:

\[ 0 = \sum_{t=1}^{T} \frac{C_t}{(1 + IRR)^t} - C_0 \]

Where:

$ C_t $ is the net cash inflow during the period $ t $.
$ C_0 $ is the total initial investment costs.
$ IRR $ is the internal rate of return.
$ t $ is the number of time periods.

Example

Let's say the initial investment is $1000, and the cash flows for the next three years are $400, $500, and $600. Using the formula:

\[ 0 = \frac{400}{(1 + IRR)^1} + \frac{500}{(1 + IRR)^2} + \frac{600}{(1 + IRR)^3} - 1000 \]

By solving this equation iteratively, we find that the IRR is approximately 18.56%.

What is the Internal Rate of Return?

The internal rate of return (IRR) is a financial metric used to evaluate the profitability of an investment. It is the discount rate that makes the net present value (NPV) of all cash flows equal to zero.