Internal Rate of Return (IRR) Calculator

It is a very important financial concept used in evaluating different investment options according to their profitability. Internal rate of return also expresses the rate of added value the investment will create. It is also referred to by different names such as internal rate of return, internal rate of profitability and marginal efficiency of investment.

Internal rate of return is defined as the discount rate that equates the net present value of a cash flow to zero, in other words, the present value of future cash inflows and outflows to the present investment cost.

It is quite easy to calculate the internal rate of return if the annual net cash flows obtained from the investment are constant. However, periodic net cash flows obtained from investments are generally different from each other. In this case, the internal rate of return is found by using trial-error and interpolation method together. There are two discount rates in the calculation that give a negative and a positive net present value result. The internal rate of efficiency is determined by interpolating between these two values.

In the choices made among alternative investments, priority is given to the project with the highest internal rate of return. The internal rate of return indicates the highest interest rate that can be paid if the investment is financed entirely by debt.