Investment Results
Internal Rate of Return (IRR)
0%
Net Present Value (NPV)
$0
Cash Flow Analysis
| Year |
Cash Flow |
Present Value |
Cumulative PV |
Understanding Internal Rate of Return (IRR)
What is IRR?
Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. It represents the actual annual return earned on an investment, making it a crucial metric for comparing different investment opportunities and making capital allocation decisions.
IRR vs NPV Analysis
- IRR: Percentage return rate of the investment
- NPV: Absolute dollar value added by the investment
- IRR > Required Rate: Investment is attractive
- NPV > 0: Investment creates value
- Use both metrics for comprehensive analysis
Investment Decision Rules
- Accept if IRR > Cost of Capital
- Reject if IRR < Cost of Capital
- Consider NPV for mutually exclusive projects
- Use MIRR for non-conventional cash flows
- Factor in risk and strategic considerations
IRR Limitations
- Assumes reinvestment at IRR rate
- Multiple IRRs for non-conventional cash flows
- Scale bias favors smaller projects
- Timing bias ignores project duration
- May conflict with NPV rankings
Modified IRR (MIRR)
- Addresses reinvestment rate assumption
- Uses cost of capital for discounting
- Single solution for all cash flow patterns
- More realistic return measure
- Better for comparing different projects
Practical Applications
- Capital budgeting and project evaluation
- Real estate investment analysis
- Private equity and venture capital
- Equipment purchase decisions
- Business acquisition analysis
How Our IRR Calculator Works
Our IRR calculator uses the Newton-Raphson iterative method to solve for the discount rate that makes NPV equal to zero. It also calculates NPV, MIRR, payback period, and profitability index to provide comprehensive investment analysis.
The calculator handles irregular cash flows and provides visual analysis through charts and tables. Use these results to compare investment alternatives and make informed capital allocation decisions.
15%
Typical Good IRR Threshold
10%
Average Market Return
1.0+
Good Profitability Index
5-7
Years Typical Payback