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 commonly used to evaluate the profitability of potential investments.

2. How Does the Calculator Work?

The calculator uses the Newton-Raphson method to solve:

Where:

• \( CF_t \) — Cash flow at time period t
• \( r \) — Internal rate of return (IRR)
• \( t \) — Time period (typically years)

Explanation: The calculation finds the rate where the present value of inflows equals the present value of outflows.

3. Importance of IRR Calculation

Details: IRR helps investors compare the profitability of different investments. A higher IRR typically indicates a more desirable investment.

4. Using the Calculator

Tips: Enter cash flows as comma-separated values (first value is typically negative for initial investment). Example: -1000,200,300,400 represents $1000 initial investment with returns of $200, $300, and $400 in subsequent periods.

5. Frequently Asked Questions (FAQ)

Q1: What's a good IRR value?
A: Generally, an IRR above the cost of capital (often 8-12%) is considered good, but this varies by industry and risk.

Q2: How does IRR differ from ROI?
A: IRR accounts for the time value of money while ROI doesn't. IRR gives an annualized return rate.

Q3: What are IRR's limitations?
A: IRR assumes reinvestment at the same rate and can give misleading results with non-conventional cash flows (multiple sign changes).

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

Q5: Why might my calculation return 'N/A'?
A: This happens when the algorithm can't converge to a solution, often with unusual cash flow patterns.