Simple Irr Calculator

IRR Formula:

\[ IRR \approx L + \frac{NPV_L}{NPV_L - NPV_H} \times (H - L) \]

L (low rate, %):

H (high rate, %):

NPV_L ($):

NPV_H ($):

Estimated IRR:

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1. What is the IRR Formula?

The IRR (Internal Rate of Return) formula using linear interpolation approximates the discount rate that makes the net present value (NPV) of cash flows equal to zero. It provides an estimate of the profitability of potential investments.

2. How Does the Calculator Work?

The calculator uses the IRR approximation formula:

\[ IRR \approx L + \frac{NPV_L}{NPV_L - NPV_H} \times (H - L) \]

Where:

$ L $ — Low discount rate (%)
$ H $ — High discount rate (%)
$ NPV_L $ — Net Present Value at low rate ($)
$ NPV_H $ — Net Present Value at high rate ($)

Explanation: The formula uses linear interpolation between two discount rates where NPV changes sign to approximate the actual IRR.

3. Importance of IRR Calculation

Details: IRR is a crucial metric in capital budgeting that helps investors evaluate the profitability of potential investments and compare different investment opportunities.

4. Using the Calculator

Tips: Enter low and high discount rates in percentage, and their corresponding NPV values in dollars. Ensure NPV_L and NPV_H have opposite signs for accurate interpolation.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between exact IRR and this approximation?
A: This method provides an approximation using linear interpolation, while exact IRR requires iterative numerical methods to solve the polynomial equation.

Q2: When should I use this approximation method?
A: This method is useful for quick estimates and when you have NPV values at two different discount rates with opposite signs.

Q3: What are typical IRR values for good investments?
A: Generally, IRR higher than the cost of capital indicates a good investment. The higher the IRR, the more desirable the project.

Q4: What are the limitations of this approximation?
A: The accuracy depends on how close the two rates are to the actual IRR and the linearity of NPV between the two points.

Q5: Can this method be used for all types of cash flows?
A: This method works best for conventional cash flows (initial outflow followed by inflows). Multiple IRRs may exist for non-conventional cash flows.