Internal Rate of Return (IRR)
  IRR =    
  Initial investment :
Year Cash-In Cash-Out/ Net Cash Flow
Investment
0
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  Total:
                                   
    References
    Internal Rate of Return (IRR)
    Internal Rate of Return (IRR)  
    IRR is the discount rate that makes the NPV (net present value) equal to zero; IRR is also called effective interest rate, or rate of return. It is used to evaluate an investment or project. Typically the higher the IRR, there is more possibility to undertake the project.  
    IRR is a rate, a percentage, while NPV is an absolute value. IRR is usually used to calculate the profitability of an investment or a project. If the IRR is greater than the cost of capital, the investment or project may be accepted. Otherwise, it should be rejected.  
                                 
                                   
    How to calculate IRR?  
    NPV formula is as below:                  
N
      NPV = Ʃ   Ct                  
        (1+i)ᵗ                
t=0
    Since IRR is the rate to make NPV=0, we get the below functions:  
N
Ʃ
Ct = 0
        (1+i)ᵗ                
t=0
    or                            
    PV of benefits - PV of costs = 0              
    “i” is IRR, as the only unknown, it can be solved by using numerical or graphical analysis techniques.  
    Let's see the example:  
    An $85,000 investment returned $30,000 per year over a 5-year lifespan, what is the rate of return on the investment?  
                                   
    Solution:   
    30000/(1+i) + 30000/(1+i)² + 30000/(1+i)³ + 30000/(1+i)⁴ + 30000/(1+i)⁵ = 85000  
    IRR is 22.5%.