If you want to check the internal rate of return for any investment, the IRR calculator is the best online free tool to get the job done without hiring an accountant. Since the calculator works in Dollars ($) only, you have to convert your spent money into dollars first. For that, check the exchange value and multiple it with the amount you want to insert. Enter initial investment in the first box and then the coming year’s amount in the next boxes. You always have an option to add more years or remove already entered boxes if you want to check IRR for less than mentioned years. Finally, hit the calculate button, and you’ll get your results on the right side.

What is IRR?

IRR means the internal rate of return, also known as the discount rate, based on all the NPV (Net Present Value) of all the cash flows, including positive and negative from an investment equal to zero. This is the most used financial metric applied to analyze the potential of any investment or project. It means if IRR is high, you can expect a good return on the investment, and a lower IRR indicates the inverse results. Let’s find out how you can calculate IRR or what formula does this IRR calculator use.

How to Calculate IRR?

Since the internal rate of return is calculated in terms of NPV (use NPV calculator to calculate net present value), the net present value should be equal to zero. Use this formula to calculate the IRR of an investment.

Where:

N = total number of periods
n = positive integer
C = cash flow
r = internal rate of return
NPV = net present value

General Example of IRR

Suppose you have an initial amount (investment) of $10,000 that you want to invest in a project. The expected cash flow for three years is $4500,$4000, and $5500, respectively. Let’s see how the formula applies to get the results.

Since the formula is this:
0 = C1/(1+r) + C2/(1+r)² + C3/(1+r) ³ - initial investment

After inserting the values, it would be like this:
0 = 4500/(1+r) + 4000/(1+r) ² + 5500/(1+r) ³ - 10000

The result shows IRR is 18.2%
It means if you’re getting a 10% return on other investments, you must pursue this project which yields a higher return of 18.2%.

Limitations of IRR

IRR should not be used for deciding multiple investments’ worth but rather used for a single investment to see how much potential a project has. Otherwise, you may not get extra precision and accuracy for the results.

Also, you may get the same result for re-investing at the same rate, but the reality is different — values change over time due to external factors. IRR’s shouldn’t be the same of multiple amounts due to external factors that never give the same results.

When to Use an IRR Calculator?

If you have more than one project going on or are likely to start multiple projects. All the projects require the same investment. You should choose the one with a higher IRR. In big corporations, IRR plays an important role in stock buyback programs to show if the investment in the company`s own stock is better than any others.

Final Words

Whenever you are looking to make small or big investments, you should consult online IRR calculators to have a rough idea but never expect precise and accurate results. Once you have got the estimation, go for professional consultants to get the more precise results to make your investment successful and get as much return as you can. Make sure you have the amount in the same currency as mentioned in the IRR calculator.